United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR THOMAS KIBLING (of Counsel) Messrs Browne Jacobson Solicitors 44 Castle Gate Nottingham NG1 7BJ
For the Respondent	MR DECLAN DEMPSEY (of Counsel) Actons Solicitors 2 King Street Nottingham NG1 2AX


 


JUDGE REID QC:

Preliminary

1. On 10th June 1999 an Employment Tribunal sitting at Nottingham held on a preliminary point that Mr Chapman had more than two years continuous employment with Beauvale Furnishing Limited ['Beauvale']. The tribunal gave reasons under the title "Summary Reasons". From that decision Beauvale appealed. The Chairman subsequently refused to give Extended Reasons on the ground the request for them was out of time. On 10th December 1999 the Employment Appeal Tribunal ordered that the appeal proceed to a full hearing on the basis of the Summary Reasons.

The Issues

2. The decision of the Employment Tribunal resolved two questions:

(1) whether Mr Chapman was an employee throughout the period January 1996 to December 1998 when he worked for Beauvale and

(2) if so, whether there was illegality in the performance of the contract until mid-June 1997 such that he could not rely on that period in computing his length of service.

3. Before the Employment Appeal Tribunal it was accepted that he had been an employee throughout the period January 1996 to 1998 and the issue was as to illegality, the allegation being that until June 1997 Mr Chapman was committing a fraud on the Revenue/or the Legal Aid Board.

The Law

4. In order for a claimant to be qualified to claim unfair dismissal it is necessary for him to have been engaged for the requisite time (in this case two years) under a contract of employment. If the contract is illegal and void, the claimant cannot rely upon it and so cannot prove that he was an employee for the requisite period. In Hyland v J H Barker Ltd [1985] ICR 861 at 868 Popplewell J, delivering the judgment of the EAT stated the law:

"If the contract is an illegal contract and for a period of time is such as to affect the statutory continuity of employment, then for that period the contract cannot be relied on and the necessary continuity of legal employment is not established."

5. In Napier v National Business Agency [1951] 2 All ER 264 the Court of Appeal held that the provisions of a service agreement relating to expenses were intended to mislead the taxation authorities and evade or postpone the proper payment of tax and therefore the agreement was contrary to public policy and unenforceable: see especially at p.266A-B per Evershed MR – cited with evident approval in Hyland v J H Barker Ltd [1985] 861 at p.865. In Newland v Simons Willer Ltd [1981] ICR 521 May J, delivering the judgment of the EAT said at p.533:

"If an employee wishes to be entitled to the statutory rights given him by the relevant legislation, then the contract of employment in respect of which he seeks those rights and its performance both by himself and his employer to his knowledge must each be legal. That is to say, that they conform to the law. We have no doubt that Parliament never intended to give the statutory rights provided for by the relevant employment legislation to those who were knowingly breaking the law by committing or participating in a fraud on the revenue."

6. The payment of wages free of tax does not necessarily render a contract of employment illegal and void. The manner of performance, - e.g., the production of false documents or the making of false entries in wage books – may do so. Whether the employee is affected by the illegality will depend on the state of the employee's knowledge: see Newland v Simons Willer Ltd (Supra).

The Facts as they presently appear

7. In the late summer of 1995 Beauvale offered Mr Chapman employment. He responded by a letter dated 8th September 1995 which contained the following passage:

"Because of my particular financial situation which is slightly unique I could not be a director of the company and would not like my wages known to the Inland Revenue generally. I would have to be a consultant to the company for at least the next 2 years. I could put together a package that was realistic but would be tailored to fit my situation for disclosure purposes I will discuss only if this is acceptable. We are the only people who need know."

8. In February 1996 Mr Chapman commenced employment with Beauvale, in fact as an employee but ostensibly as a consultant. Thereafter he presented invoices to Beauvale for "Sales/Marketing Consultancy". He was paid gross at the rate of £3,333.00 per month. On the face of the documents this continued until June 1997. In July 1997 he received for the first time a pay slip and was paid with tax, NIC and other deductions made at source. The payslip itself appears to suggest that deductions had been made from Mr Chapman's remuneration from the beginning of the tax year but whether this was in fact the case is unclear.
9. Mr Chapman informed the Contribution Agency he was self-employed and "completed his certificate" (as the Employment Tribunal put it) to that effect.
10. The tax and National Insurance documents before the Employment Tribunal disclosed on their face that he was paying National Insurance contributions as a self-employed person, that he was representing himself to the Contributions Agency as the owner of a business, and that he was not making tax returns as required by law. They further showed that for the year 1995/1996 he paid tax on an estimated assessment of his profits of £4,000 and escaping any liability for Class 4 National Insurance on the basis of that same profits figure. For the year 1996/1997 he apparently paid tax amounting to £1,000 on his income.
11. The Employment Tribunal found that Mr Chapman was "at the beginning of his service in receipt of legal aid and states that he was concerned that formal employment would have caused a suspension of such aid, and this was the reason why he wishes to begin his association with the company with a self-employed label." The tribunal also found that "he requested that his status be changed to that of an employee as early as May 1996. This was soon after his litigation had been concluded." There is no finding as to what he in fact told the Legal Aid Board or when, or what he did or tried to do to regularise his position.
12. The Employment Tribunal records Mr Chapman's evidence was that he "conducted his tax affairs properly throughout his association with the respondent", and that he "kept the Revenue informed of his status and paid his taxes as demanded."

The Contested Conclusions

13. The Employment Tribunal concluded:

(1) Although Mr Chapman wished information as to his income to be delayed so far as the Legal Aid Board was concerned because he wished his legal aid to remain undisturbed, it was not his intention that the Board would not at some later date be informed of his new circumstances. "This was wrong, but it is a matter between the applicant and the Legal Aid Board and does not render the contact of employment illegal."

(2) "The tax documents that are produced to us do not lead us to conclude that tax and insurance contributions were avoided."

(3) "On the evidence before us, we do not consider any delay [in the payment of taxes] to have been significant."

(4) "There is no evidence at all, despite the contents of the letter of 8 September 1995, that the applicant did not pay his proper tax liability throughout his association with the respondent, either on assessment under Schedule D or later, on a PAYE basis."

14. The tribunal therefore held that the contract was not tainted with illegality and so was enforceable.

The Appellant's Challenge

15. Beauvale challenged these findings, asserting that the tribunal had failed to recognise that the arrangement was a fraud on the Inland Revenue and/or the Legal Aid Board, that it should have asked itself whether Mr Chapman was aware that the arrangement was wrong or illegal, that it should not have severed the Legal Aid issue and that the decision was perverse.

The Respondent's Position

16. On the respondent's behalf it was contended that the tribunal had been entitled to hold that Mr Chapman had conducted his tax affairs properly and that there was nothing unlawful about an arrangement not intended to defraud the Revenue even if it produced a relationship of employment rather than self-employment. Further, it was contended, there was a finding of fact that it was not the intention of Mr Chapman not to tell the Legal Aid Board of his change of circumstances and that there was no nexus between the contract of employment and the Legal Aid Board.

Conclusions

17. On the face of the documents before the tribunal (contrary to its finding) Mr Chapman had not conducted his tax affairs properly. The documents disclosed that he failed to make his tax returns and that he paid tax not on the basis of his earnings but on the basis of a far lower income. It was also apparent from the documents that Mr Chapman, as a result of arrangements made, was paying far less by way of National Insurance contributions than he should have done on the basis of his earnings as an employed person. Thus, it was clear that Mr Chapman was either postponing or avoiding the payment of substantial amounts of tax.
18. Contrary to the findings of the tribunal there was evidence – and compelling evidence – that Mr Chapman did not "pay his proper tax liability throughout his association with the respondent."
19. In our judgment the tribunal's findings, on the material placed before us and on the basis of their Summary Reasons can best be described as unsustainable. The material produced to us was consistent, and consistent only, with an intention at the outset on Mr Chapman's part to defraud the Revenue by purporting to be self-employed when he was in fact employed, thereby (at its lowest) gaining the advantage of a postponement in the payment of tax. There was, indeed, no evidence apparent on the material made available to the Employment Appeal Tribunal that he had ever paid the tax which he should have done. There is no adequate explanation in the decision of the Employment Tribunal of how it came to a conclusion (contrary to what appears from the documents) that Mr Chapman kept the Revenue informed of his status or that he paid "proper tax liability".
20. The position so far as the Legal Aid Board was concerned is more obscure. It is not apparent how it is suggested that informing the Legal Aid Board that he was self-employed rather than employed was supposed to assist Mr Chapman provided always that he was truthful as to his income. In these circumstances it does not seem to us that the finding of the tribunal on this point can be characterised as perverse. What Mr Chapman was doing wrong, on the tribunal's finding, was delaying telling the Board so that his Legal Aid should remain unaffected. This does not affect the legality of his contract of employment.
21. In the light of our finding that the decision of the tribunal on the Inland Revenue point was not sustainable, the decision of the tribunal must be discharged. The question then arises as to whether the Employment Appeal Tribunal can properly substitute a decision that Mr Chapman did not have more than two years' employment with Beauvale or whether the matter should be remitted to an Employment Tribunal for a rehearing.
22. In our judgment the case should be remitted. Whilst the decision was, on the face of the Summary Reasons and the documents before the Employment Appeal Tribunal unsustainable, we are concerned that, as was suggested in the course of submissions; there may have been material which was not rehearsed in the summary reasons which influenced the tribunal. Furthermore there are not adequate findings as to Mr Chapman's purported attempt to regularise his position with Beauvale or as to the nature of his communication (if any) with the Inland Revenue on the basis of which he might be able to assert that any illegality came to an end more than two years before his dismissal. In all the circumstances we take the view that the proper course is to remit the case for rehearing before a differently constituted tribunal.