Taxi Driver Online

Newth Talks Tax: Employed/self employed

Helen Dobbs raised a query about taxi drivers in her query of 27 November 2007. After an HMRC PAYE Enquiry into the affairs of a client, the Revenue stated that all the taxi drivers used by the client were employed and not self-employed.

All the taxi drivers were registered as self-employed, completed their own self-assessment tax returns and paid their tax. HMRC required all details of payments to drivers in order to work out the tax liability.

Helen asked if anyone knew whether HMRC intended to gross up payments and then calculate employer's NIC, or do they take into account the tax and NIC that the individual taxi drivers had already paid? She wanted to be prepared for the next stage of the process.

Stephen Kendrew suggested that, before Helen started worrying about the calculations, she should make sure that HMRC was correct in it's view that the taxis drivers are employed. In his experience PAYE auditors do not fully understand the rules for determining whether someone is self-employed or an employee. They will usually decide that someone is an employee immediately without examining the facts. I heartily concur with this point of view, having won a case where the HMRC PAYE auditors initially stated that about 30 subcontractors of a (non-construction) company were employees.

Stephen also suggested that Helen should look on the tax tribunals website to study the Special Commissioners cases of Parade Park Hotel and Paul May v HMRC. These cases include a good outline of the decision process, and one should concentrate on the issues of mutuality of obligation, substitution and control.

Before the case of HMRC v Demibourne SpC 486, HMRC could only collect the difference in tax and NIC where someone was re-designated an employee. In other words the tax and NIC that the employer should have deducted less the tax paid by the self-employed person. Now HMRC adopt the strict position and collect the full tax from the employer, and refund that tax paid by the individual to him or her. Stephen also referred to replies that I had submitted to queries 171308, 171987 and 165970.

Jim Greenwood observed that there is some amelioration of this rule. If the individual signs a form stating that they will not apply for a tax refund, then HMRC will still consider a set-off. But how likely is it that someone would sign such a form? IRH had had two cases where the mandate was signed without a problem.

Paul Sparrow agreed wholly with Stephen about the initial lack of review by PAYE officers. That opinion very often needs to be challenged. The only time the 'Demibourne' procedure presents a real problem is where the employer has lost touch with the 'employee'.

Michael Shenker suggested that Helen should use the HMRC ESI Status tool. He had had remarkable success with it, but in only one case. Paula considered that ESI should be used with caution. It is based on the Revenue's interpretation of case law, and in any case the Revenue do not always accept the results of the tool! It is better to read up on relevant case law. David Smith's book on 'IR35 Defence Strategies' (recently republished by Tottel) is a great resource for status cases.

I would like to add a few points, while agreeing completely with Stephen and Paula. First the client and the tax drivers have to decide how much they want to continue the self-employment status (or not). Employment law may come into this decision as regards the taxi drivers. As far as the client is concerned, if employee status is accepted, then there will be a substantial bill for past and present employer's NIC.

If the client wishes to fight the HMRC decision then evidence should be assembled on the basis of the true facts and 'badges of trade'. There is an HMRC Business Economic Note (BEN 25) on taxi drivers and private hire vehicles that may be helpful.

One of the most recent cases regarding IR35 and employment status is Dragonfly Consulting Ltd SpC 655, which HMRC won and which some commentators consider alters the balance of probabilities in favour of the Revenue's views in such cases. The Special Commissioner considered factors such as mutual obligations, control and consistency in reaching his decision in a case based on other facts. Consistency was defined as 'being in business on one’s own account'. However, even more recently the taxpayer has won two status cases before the Special Commissioners, Castle Construction and Window & Door Services & Molloy. So all is not lost.

If Helen and the client want to fight this case, then I consider they may need expert help. Accountax Solutions (recently taken over by Abbey Tax) are the obvious port of call, although the fees will not be cheap. The tax savings in the long run could counter this.

Finally, if the worst comes to the worst, I do not believe that HMRC will gross up the amounts paid to the tax drivers in order to calculate tax and Class 1 NIC due.

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Think of how stupid the average person is, and realize half of them are stupider than that.
George Carlin