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During the past few years the Revenue has issued an increasing number of manuals, previously in hard copy form, but now on its internet website. One of the latest of these is the Employment Status Manual.
One has to say, first of all, that any Revenue manual contains statements which are no more than the department's view on any transaction or situation. Nevertheless, the manuals are extremely helpful in establishing the Revenue's view on matters.
The other difficulty with some of the new manuals, including the Employment Status Manual, is difficulty of access. The Employment Status Manual contains 320 paragraphs and the number of pages is in excess of this number. If one is to research and read a manual properly, it is not possible to do so by looking at a computer screen, and so the writer's solution was to print out the several hundred pages of the manual individually from the website. This is hardly an example of open government, and one trusts that some solution to this continuing problem will be considered by the department.
What it contains
After four introductory paragraphs at ESM002 to ESM005 there are 31 paragraphs of procedural aspects contained in ESM0100 to ESM0130.
There then follow 25 paragraphs of the basic guide to determining status between ESM0501 to ESM0525 and then 54 paragraphs on the detailed guide to determining status from ESM1001 to ESM1105.
Subsequent subjects are 20 pages on agency workers from ESM2000 to ESM2020 and four paragraphs on 'offices' from ESM2500 to ESM2504.
Service companies and other intermediaries are dealt with in 100 paragraphs between ESM3000 and ESM3204 and finally there are 89 paragraphs on particular occupations between ESM4000 and ESM4531.
The case law summary listed on the website at ESM7000 et seq appears not to be accessible at this point in time.
Why is it necessary?
There is no doubt that IR35 and personal service companies or, more correctly, 'provision of services through an intermediary' has provoked the Inland Revenue into the issue of the Employment Status Manual. The IR35 issues in the manual are examined in Mark Morton's article at pages 629 to 631 of this issue of Taxation.
Inland Revenue pronouncements which were previously contained in leaflets, Tax Bulletins and the Revenue website are now all encapsulated into the Employment Status Manual. Some of the material that was in the Schedule E Manual has also been transferred to the Employment Status Manual.
The manual also illustrates the Inland Revenue's interest in the much broader subject of employment and self employment, quite apart from personal service companies. Perhaps because of self assessment, this issue has taken a much wider profile, and is also interrelated to employment law matters. Readers will be aware that pay-as-you-earn audit teams and Schedule E Compliance Inspectors are increasingly seeking to classify workers as employees in borderline cases.
There is of course also the fundamental point that there is no statutory definition of self employment and its distinction from employment in tax law. On the other hand, there is increasing case law on the subject, which includes perhaps up to thirty tax cases and certainly the same number or more of employment law cases which are relevant to any disputes between taxpayers and the Inland Revenue.
Initial views
One has to emphasise once again that any manual represents the views of the Inland Revenue on any particular transactional subject and not a recitation of the law. This is particularly appropriate for a subject where there is no statutory definition, and therefore the statements of the Inland Revenue must all contain a 'health warning'.
Readers who are regularly dealing with status cases will observe that the many quotations from case law have a bias towards the Inland Revenue stance – and that is to make as many workers as possible employees for tax purposes.
Having said that, the manual is useful in establishing the Inland Revenue attitude to particular occupations. The paragraphs between ESM4000 and ESM4530 cover over 60 individual occupations, quite apart from the issue of personal service companies. For instance occupations such as agency nursing staff, milk roundsmen, journalists, school inspectors, election agents, contract agricultural workers, barristers' clerks, care workers, cleaners and demonstrators and merchandisers are commented on, apart from numerous others.
This illustrates that personal service companies are part of a much wider and broader issue which will in time have a more enduring impact.
Those dealing with personal service companies will find the 100 paragraphs between ESM3000 and ESM3204 useful. All the relevant points and calculations are included, together with the numerical examples that are required in order to deal with the legislation.
There is, of course, a list of contents, but no index.
Illuminating extracts
An article of this length cannot comment on the various paragraphs in detail but the writer will highlight one or two paragraphs that may be of interest to readers.
Paragraphs ESM0112 and ESM0113, in the section about procedural aspects of status cases, talk about the binding nature of opinions in writing and advice about signed, written contracts. The Revenue talks about 'any previous opinion given in writing as binding' and its view concerning signed, written contracts. Both the Revenue and practitioners need to be reminded that the question of whether someone is employed or self employed is a matter of law, whatever the Revenue or the taxpayer says.
Paragraph ESM0115, once again under procedural aspects of tax cases, deals with self-assessment enquiries and status reviews. This paragraph illustrates perfectly that there is a clear correlation between status reviews and self-assessment enquiries into individual tax returns. This will ring a few alarm bells with practitioners.
'Badges of trade' are a favourite subject for status Inspectors and paragraph ESM0511, once again under the basic guide to determining status, comments on the provision of equipment. In the final paragraph, ESM0511 states 'if the employer provides any necessary equipment, this fact will point towards the existence of a contract of employment'. To be fair, the paragraph then goes on to state that this factor is only one to be taken into account in the context of the overall picture. Nevertheless, practitioners will be aware that the statement goes right against the decision in Hall v Lorimer [1994] STC 23, as well as a number of other cases.
Another badge of trade is the right of control and paragraph ESM1015 states 'if there is no right of control it is unlikely that there will be an employment'. Tax practitioners dealing with status matters might like to reproduce that statement, frame it and hang it on their office wall!
Shortly after, paragraph ESM1017 comments on control over what the worker does. Without going into all that the Revenue says, ESM1017 completely ignores Barnett v Brabyn [1996] STC 716. This case is not even mentioned in the Employment Status Manual, undoubtedly because the result was embarrassing to the Inland Revenue. The department contended that Mr Barnett was self employed, and the court so found, despite the fact that a number of the usual badges of trade indicated employment, including several elements of control.
Moving much further on in the manual, we come to the paragraphs that deal with personal service companies. Paragraph ESM3163 deals with Step 4 of how to work out the deemed payment and includes the extraordinary statement 'the fact that a contract may require the intermediary to own computer equipment does not necessarily mean that it is necessary to the performance of his duties'. I will not even comment on that statement, but readers will no doubt draw their own conclusions.
Conclusion
Having studied the Employment Status Manual in detail, first of all it is good to see all the material regarding employment and self-employment status brought together 'under one roof'. It is also very helpful to read detailed comment by the Inland Revenue on a large number of individual trades, occupations and professions in paragraphs ESM4000 to ESM4531.
The section on personal service companies mirrors, to some extent, much of the material in Anne Redston's book on the subject published by ABG, and the writer and her publisher may well feel that they took the right approach by publishing before the Employment Status Manual came out. As it is, practitioners can now access much of the information from the Revenue website.
The manual highlights the fact that job status is not defined or differentiated in tax law and Revenue statements are full of provisos arising from this fact. This is a volatile area of tax and employment law and further cases will no doubt reach the tribunals and courts within the coming years; that is, unless a statutory definition of self employment and its distinction from employment is enacted – and that is most unlikely.
Practitioners with clients who say that they are self employed, but where the Revenue contends employment, therefore have a difficult choice to make. First of all, the employment law implications have to be considered, particularly in the light of employee benefits and the rights to redundancy, sick pay and maternity pay, etc. Does the worker really want to be self employed?
If the answer to that is yes, the cost of fighting the case then has to be considered. Are the long term benefits of a self-employed status for tax purposes worth the current cost of fighting the case? This will involve considerable commitment and determination, funds and the ability to establish and collate the facts. Any status dispute is likely to take time – possibly years, and may well end in a possible appeal before the Commissioners. In the view of the writer such a case should always be taken before the Special Commissioners and this could involve the retention of counsel.
Some practitioners will consider that the costs and obligations are too great, but there is no doubt that the client should be faced with them.
The alternative is for the taxpayer and his agent to accept, meekly, every situation where the Inland Revenue states (in its ruling) 'Mr X is an employee', without any defence of the client's position. This is not healthy, either from a legal viewpoint, or the relationship between the professions and the Inland Revenue.
There are therefore no easy answers, and this particular part of tax and employment law is likely to develop further over the forthcoming years.
