United Kingdom Special Commissioners of Income Tax Decisions

Demibourne Ltd v Revenue and Customs [2005] UKSPC SPC00486 (23 June 2005)

SPC00486

Income tax – PAYE determinations – whether individual an employee – determinations confirmed

National insurance – secondary contributions – whether individual an employed earner – decision confirmed

Jurisdiction – "legitimate expectation" – appropriate forum for remedy – whether basis for claim

THE SPECIAL COMMISSIONERS

DEMIBOURNE LTD Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondent

Special Commissioner: JOHN CLARK

Sitting in public in London on 22 April 2005

Oliver Conolly of counsel, instructed by Amin, Patel & Shah, Accountants, for the Appellant

Mike Faulkner, Southern England Regional Appeals Unit, Her Majesty's Revenue and Customs, for the Respondent

© CROWN COPYRIGHT 2005

DECISION

1. This appeal relates to an employment status dispute. The issue is whether during the period from 6 April 1997 to 5 April 2002 a particular individual, Mr Rodney Bone, was (as the Appellant, "Demibourne", also referred to as "the hotel", contends) a self-employed person working for it under a contract for services, or (as the Respondent, referred to in respect of all times covered by this decision as "HMRC", contends) an employee working for Demibourne under a contract of service.
2. On 16 January 2004 Demibourne appealed against a decision made by HMRC that Mr Bone was to be treated as an employed earner in respect of his engagement with Demibourne for the relevant period, and that it was liable to secondary Class 1 contributions in respect of the earnings from that engagement. HMRC has accepted that the appeal also applies to income tax determinations made in respect of that period.

The facts

3. The evidence consisted of HMRC's bundle of documents, which included an agreed statement of facts not in dispute. In addition, witness statements were given by Mr Bone as a witness for HMRC, and by Mr Kevin Halstead, General Manager of the Frensham Pond Hotel, and by Mr A.D. Patel, a director of Demibourne, both as witnesses for Demibourne. All the witnesses also gave oral evidence.
4. The agreed statement of facts sets out the following information:

(1) Demibourne acquired the Frensham Pond Hotel, located in Surrey, on 16 November 1987. The purchase agreement acknowledged that it was governed by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794).

(2) Mr Bone was employed by the vendor of the hotel, and under the sale agreement his contract was transferred to Demibourne. Mr Bone was employed by (and the appropriate deductions were made by) Demibourne until April 1993, when he reached the age of 65.

(3) Between April 1993 and April 2002 he continued working at the hotel, but PAYE was not operated and he was regarded as self-employed.

(4) A Compliance Office of HMRC visited the hotel in January 2002 and expressed the view that Mr Bone was an employee. She confirmed her opinion in a letter of 31 January to Mr Halstead.

(5) Demibourne operated PAYE on Mr Bone's earnings from 6 April 2002 to 31 January 2004. Mr Bone ceased working for Demibourne at some time around April 2004.

(6) There has never been a written contract between Demibourne and Mr Bone.

(7) Mr Bone undertook all general maintenance for the hotel, including looking after the sewage system. There was no change in the nature of the work that he carried out or the terms and conditions under which he worked after Demibourne stopped operating PAYE.

(8) The Duty Manager at the hotel would show Mr Bone what needed to be repaired or maintained.

5. There were various conflicts between the evidence of Demibourne's witnesses and that of Mr Bone. As the outcome of this appeal depends to a considerable extent on the findings of fact, the evidence of each witness is first considered, and findings made after comparing the evidence of all three.

Mr Halstead's evidence

6. Mr Halstead had been employed by the hotel as General Manager since November 1992. Mr Bone's employment ceased upon his attaining 65. Mr Halstead organised a leaving party for Mr Bone, and Demibourne gave him a leaving gift. Following a meeting with Mr Patel, Mr Bone had expressed a desire to continue to offer his services to the hotel on an ad hoc basis. It was explained to Mr Bone that his employment with Demibourne had ceased, as 65 was the age for company employees to retire. Afterwards, Mr Bone worked according to a maintenance list that was provided to him, or worked when called by the hotel; he attended the hotel upon receipt of a call from the Duty Manager or General Manager, or when he saw fit, and provided all his own tools, which Mr Halstead believed were stored in Mr Bone's car. The ladders (the ownership of which was disputed) were kept in the hotel, and Mr Bone had various other personal items stored there. Following his retirement Mr Bone no longer carried a "bleep" to summon him; he was contacted by mobile phone.
7. After his retirement Mr Bone had much more jurisdiction over what he did and when he did it. Mr Bone would attend the hotel when he wanted; he frequently used to state (usually the day before an absence) that he was not available for the next few days as he was visiting family or friends or had other engagements. Mr Bone did not claim travelling or petrol allowance or include these in his invoices. He did not work specific shift patterns. Over the years the hotel employed a number of maintenance assistants. There had been occasions when Mr Bone had brought someone in to help him; Mr Halstead could not recall whether Mr Bone had been paid extra when this occurred. Mr Bone provided the hotel with an invoice when he worked. He operated a business and purchased goods for the hotel in his name, although some purchases were made in the name of the hotel and reimbursed to him. He was not paid a specific weekly wage but was paid against invoices submitted for works undertaken. If he came in for two hours, he was paid the day rate, as he was if he stayed late. On submission of his invoices, on which his name and address details were imprinted with a rubber stamp, Mr Bone was paid by company cheque. Mr Halstead was aware that Mr Bone completed his own tax returns and made payments as due. Mr Halstead referred to work which Mr Bone carried out for other persons.

Mr Patel's evidence

8. Mr Patel had been a director of Demibourne since 1987. It had purchased the hotel as a going concern, and Mr Bone was one of the employees taken over. The company's policy was that under normal circumstances an employee would retire on attaining the age of 65. A farewell party was held for Mr Bone, and a gift was presented. Mr Bone had become emotional and asked to continue to work. Mr Patel had offered that Mr Bone could continue, although the hotel had another person already. A negotiated settlement was reached that Mr Bone would provide his services and render bills; he would not be governed by the company, and would be his own master. Mr Patel did not take any advice on this arrangement, nor did he discuss it with the other directors before agreeing it. When Mr Bone's attendance was required it would be called for on his mobile phone. He would attend the work and raise an invoice. Even if he worked only for two hours, he would be paid for the full day. Demibourne paid these invoices by cheque, whereas employees were paid on a weekly basis in cash, with all the details on their pay packet. After his retirement he did not receive a mileage allowance. The employees worked on a rota system, whereas Mr Bone worked as and when called. Before his retirement he had also worked on the rota system, as a maintenance man. Afterwards the hotel had to call him and tell him about the problems; it had no control of Mr Bone's hours or the length of breaks that he took. Any time off was agreed with Mr Halstead, not Mr Patel.
9. Mr Bone used his own tools to provide the services required by the hotel; these tools were always in Mr Bone's car. To Mr Patel's knowledge there were none of Mr Bone's tools at the hotel; they would not have been insured. If particular tools were needed at the hotel, Mr Bone could bring them in the next day. Mr Bone had done work for others; Mr Patel referred specifically to Mr Hone, a garage owner, Mrs Patel (electrical work) and a Miss Tonka, the hotel restaurant manager. In all cases he used his own tools. Mr Patel disagreed with Mr Bone's statement that he had put in a window at Mr Patel's house, as triple glazing had been installed. Mr Bone had done other work, for which he had been paid direct, as well as being given food. He had not been paid for an extra day as mentioned in his statement; Mr Patel indicated that he (Mr Patel) had no right to ask for something improper to be done. Invoices would show that Mr Bone had not worked continuously at the hotel, and Mr Patel considered that Mr Bone would have been working for others for the missing periods. (Demibourne sought to produce some of these invoices at the hearing. With the parties' agreement, I decided not to admit these as evidence, and that I would adjust accordingly the weight to be given to Mr Patel's evidence on this point; I refer to this below.)

Mr Bone's evidence

10. On 7 April 2004 Mr Bone had attained the age of 76. He had started work for the hotel on 2 March 1978, and had worked for it for 26 years. He had been an employee until he reached state retirement age. At that point he had asked if he could continue working, and was told that he could only do so if he was self-employed.
11. He undertook all the general maintenance work for the hotel, including looking after the hotel's own sewerage system. He attended every day and worked regular hours; he was always on site during the day, so the hotel only needed to contact him by phone if there was an out of hours emergency. He had obtained a mobile phone in 1996 to avoid disturbance to his wife at home if the hotel phoned during the night. He worked from 8 am to 5 pm but had to stay to complete work if it had to be finished; he was often there until 6 pm. As his hours were regular, his name did not appear on the day rota. He did not ask for overtime payments, but the hotel had on occasions paid him some additional money. He received a flat weekly wage of £255, paid by cheque. If he worked a day less, this was reduced by £51. The timing of his meal breaks had to be fitted in around the work; breakfast and lunch were provided.
12. He worked on his own. He used all his own tools; he had always done so even when he had been treated as an employee. The majority of his tools were kept on the hotel premises, in a number of locations. (At the request of the hotel he had removed his tools from the basement in April 2004.) None of the maintenance assistants had tools, so they had to use his. When doing ladder work, he needed assistance. He decided what help he needed; they did the simple jobs. He had never introduced anyone to the hotel. He provided his own overalls and protective clothing and had always done so.
13. He used his own car to get equipment and to go to the bank twice a week to take the takings, bank the latter and collect the wages. He disagreed with the other witnesses' evidence concerning mileage allowance; initially he had refused it because it was too small, but eventually a rate of 25 pence per mile had been agreed. This was paid in cash and recorded in a book. He had received this more after the age of 65 than before.
14. If he needed materials, he went and collected them and paid for them on his own credit card. The hotel reimbursed him at the end of each month; Mr Patel checked the bills, and Mr Bone received a cheque. The duty manager told him what needed to be done, and Mr Bone did whatever he was told to do. His work was not really checked; he had been working at the hotel for so long that he knew what to do. He did not do work for anyone else and never had done since starting at the hotel. He did not advertise his services and did not run a business.
15. He had done work for a Mr Hone, putting in electrical sockets, for which he was paid no more than £30; Mr Hone had done some work on Mr Bone's car in return. He had also done some work for Mrs Patel, the director's wife, at their home. This included putting in a new window, a new fuse box, a new supply in to the boiler, and repairing the boiler on a number of occasions. He had been paid for this through the hotel, adding on a day's work to his normal wages; he referred to an invoice which had been amended. Mr Patel had also paid him a small amount of cash (£20) to cover the cost of the petrol. He could not recall ever doing any work for Miss Tonka Jones. His other part-time work of delivering cars had only started after he had left this hotel and started to work three days a week for another hotel.
16. Before he was 65 he had had four weeks' holiday a year. He did not receive any holiday pay or pay for bank holidays from 1993 until April 2002. If he was going to be away he would tell Mr Patel and Mr Halstead. He disagreed with their evidence that he gave short notice of leave. He normally told them some days beforehand, as the hotel depended on him and it was not his character to give just a day's notice. Once he had been treated as self-employed, he felt that he could not afford to take holidays; he would love to have gone, but finance was a problem. He could have taken time off, but not without asking.
17. If he could not attend the hotel for any reason, the work did not get done and he did it on his return. He had always done the work himself; there had never been any discussion regarding him sending anyone else in his place. He did not know anyone whom he could send in his place and he had never done so. His terms and conditions of work had not changed throughout the 26 years that he had worked for the hotel.
18. He regarded himself as self-employed. When HMRC had said that he was an employee, he had been put on the payroll. He had received four weeks holiday entitlement plus paid bank holidays since April 2002. When off the payroll he had never been off sick, but he did not believe that he would have received sick pay. The hotel had operated PAYE on the payments made to him from April 2002 until January 2004, after which the hotel's accountant had told him that he must be self-employed again. Initially he had not received any wages from the hotel since the end of January 2004, but after he had consulted the Citizens' Advice Bureau, he received payment by cheque, together with a wages slip showing the amount due and the tax deducted. He confirmed to the tribunal that his tax affairs were up to date.

Findings of fact

19. In addition to the agreed facts as set out in paragraph 4 above, I find the following facts. Until his retirement, Mr Bone was an employee of Demibourne. Following his retirement he was taken on under an oral contract; the parties considered his engagement to be on a self-employed basis. (The correctness or otherwise of their understanding that Mr Bone was to be treated as self-employed is a matter of law, and is considered later in this decision.) The reason for reaching this agreement was Demibourne's self-imposed policy of not normally engaging employees over retirement age. In the absence of a written contract, the terms are to be inferred from the course of conduct of the parties. From the transcript of Mr Bone's duplicate books as set out in the bundle, covering the period from January 1999 to September 2001, it is clear that for most weeks Mr Bone was paid the same amount, £255. For certain weeks no amount is shown, but days worked are totalled; only one week is shown as "leave". There are certain weeks for which he was paid £306, showing six days worked, and some with the amount of £204, showing four days worked. I find that Mr Bone did work full days for the periods covered by these invoices. I prefer his evidence that he spent whole days working at the hotel. I consider it unlikely that a commercial undertaking would be willing to pay a full day's rate for two hours' work carried out by an individual regarded as an independent contractor.
20. Mr Bone worked according to the maintenance list, and carried out further work as he considered appropriate. He was also summoned by phone when emergencies occurred outside his usual working hours. In practice he had a limited choice as to what work he should undertake, and as to the hours during which he did that work. His name did not appear on the day rota because of his regular hours, although before his retirement he had been on the rota. I accept his evidence that he had limited choice of when to take breaks from working, this being dictated by the necessities of the work to be carried out. As a very experienced worker with detailed knowledge of the hotel's infrastructure, he could do a great deal of his work without detailed supervision. This had also been the case during his period as an employee before his retirement. I accept his evidence that he did not bring in others to help him with the work.
21. Mr Bone, in the same way as he had done while an employee, provided his own tools; a number of these were kept on the premises. There was a dispute as to the ownership of the ladders, but as this is a relatively minor matter in the context and so does not affect the general conclusion, I do not consider it necessary to make a finding on this issue. Largely, if not exclusively, he provided his own tools.
22. Purchases of goods occurred in two ways. For a number of transactions, Mr Bone used his own credit card and was later reimbursed by the hotel after the bill had been checked. For others, the purchase was in the name of the hotel.
23. Mr Bone issued invoices in respect of each period worked; his details were shown by means of a rubber stamp, showing his name and address followed by the words: "Electrical Plumbing and General Maintenance". Once each invoice had been verified by Mr Patel, Demibourne issued a company cheque in favour of Mr Bone.
24. I do not accept Mr Patel's evidence that Mr Bone did not work continuously at the hotel. My reasons for not admitting the invoices tendered at the hearing were that they should have been provided at a very much earlier stage in order to comply with directions made in preparation for this hearing, and that in any event I was not satisfied that the invoiced in question covered a long enough period to verify Mr Patel's statement. I prefer Mr Bone's evidence that his treatment as self-employed without holiday pay resulted in him having to work for a very large part of the time at the hotel, as he could not afford to take much leave. This conclusion is supported by the transcript already mentioned.
25. I accept Mr Bone's evidence that he did eventually accept a mileage allowance of 25 pence per mile, which was accounted for separately.
26. Although there is indirect evidence that Mr Bone did carry out some work for other persons, this was very minor in comparison with his work for the hotel. I therefore do not consider it necessary to make findings relating to the other work or to the basis on which he was paid or rewarded for it. Nor do I consider it appropriate to make findings relating to the invoice mentioned at paragraph 15 above.
27. Consistently with his understanding of the agreement, Mr Bone reported his earnings to HMRC on the basis of being a self-employed individual, and paid tax accordingly.
28. Following a meeting on 16 January 2002, Mrs Emblem, an Employer Compliance Officer of HMRC, wrote on 31 January 2002 to Mr Halstead. She concluded that Mr Bone should be treated as employed rather than self-employed. She stated:

"Please note that it is not Revenue practice to charge tax twice and any tax already paid on Mr Bones [sic] earnings will be taken into consideration."

29. Although further correspondence ensued, no voluntary agreement was reached following the Employer Compliance Review, and Mrs Emblem indicated in her letter of 22 October 2002 that Section 8 decisions would be issued in relation to Mr Bone. Despite further discussions and correspondence, and the involvement of Mrs Hannington, a Status Inspector of HMRC, the dispute could not be resolved. On 16 December 2003 HMRC issued determinations to Demibourne under regulation 49 of the Income Tax (Employments) Regulations 1993 (SI 1993/744) for the years 1997-98 to 2001-02 inclusive. The pay for each year was estimated at £13,260, resulting in tax liabilities of £2,052.96, £1,957.80, £1,915.68, £1,764.36 and £1,727.96 respectively. In addition a determination covering secondary Class 1 National Insurance Contributions for the whole period covered by those years was issued in the sum of £5,867.16. An appeal against the National Insurance decision was made by Demibourne's accountants on 16 January 2004.
30. From April 2002 to April 2004 Mr Bone worked for the hotel as an employee, and received holiday pay. At the end of September 2004 Mr Halstead wrote to Mr Bone requesting him to remove his goods from the store at the hotel by 15 October.

Contentions for Demibourne

31. Mr Conolly raised the following arguments:

(1) That Mr Bone was not employed but self-employed during the period in issue, and thus no PAYE and no National Insurance Contributions were due: following the approach in Hall v Lorimer 66 TC 349 at 375, [1994] STC 23 at 29, in deciding whether an individual was employed or self-employed, an overall view of the facts must be considered, giving due weight to the relative significance of the various factors in that particular context; applying this approach, the factors led inexorably to the conclusion that Mr Bone was self-employed during the years in issue;

(2) That if there were any ambiguity in the relationship, the expressed intention of the parties that Mr Bone was to work as an independent contractor was decisive;

(3) That instead of making a determination under regulation 49, HMRC should have made a direction under regulation 42(2) that the tax be recovered from the employee;

(4) In the alternative, that the determinations under regulation 49 were invalid because tax had been paid on the income received by Mr Bone, and it was a condition of making a regulation 49 determination that tax had not been paid to the collector;

(5) That Demibourne had a legitimate expectation that its liability would be reduced by the tax paid by Mr Bone for the relevant years.

Contentions for HMRC

32. Mr Faulkner put the following points:

(1) That following the comments of Nolan LJ in Hall v Lorimer, approving those of Mummery J, the process of considering the factors in relation to an employment dispute was not a mechanical exercise but more akin to painting a picture from the accumulation of detail;

(2) That it was the right of control that mattered, not its exercise;

(3) That Mr Bone was not required to risk his own capital;

(4) That Mr Bone had provided tools both when he had been an employee and for the period in dispute, so that the provision was a neutral factor;

(5) That there was no suggestion that either party ever contemplated that work would be undertaken by anyone other than Mr Bone;

(6) That there was mutuality of obligation as described in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497; the irreducible minimum of obligation could be inferred from the longevity of the working relationship;

(7) That any work done for others was not significant, and that in any event an individual could carry on a self-employed business while working as an employee; this did not automatically make the employed work part of his business;

(8) That although this was not an absolute distinction, payment by reference to a particular project was more characteristic of self-employment, whereas payment for hours worked was more characteristic of employment;

(9) That the absence of holiday pay did not necessarily indicate self-employment but was usually an indication of how the parties viewed their relationship: in the present case, Mr Bone had "accepted the only deal he thought was on the table";

(10) That if Mr Bone's disputed contract came to an end in April 2002, there was no evidence of any change in his conditions of engagement throughout the whole period for which he worked at the hotel, and this was good evidence that he was an employee in the disputed period between the two acknowledged periods of employment: if it were argued that Mr Bone was treated as an employee after April 2002 only as a precautionary measure, there was no evidence of a change in his conditions before and after he was 65.

(11) That Mr Bone was "part and parcel" of Demibourne's organisation;

(12) That the intention of the parties could be decisive where the relationship was ambiguous and where the other factors were neutral; however, the only mutual intention when Mr Bone reached 65 was that he should continue to work at the hotel: Demibourne had said that it would only accept this if Mr Bone were self-employed, and he had acquiesced; the relationship was not ambiguous and the other factors pointed firmly towards employment;

(13) That the contract between Demibourne and Mr Bone was one of employment;

(14) That Demibourne had not produced details of the amounts paid to Mr Bone;

(15) That the regulation 49 determinations and the section 8 decision should be confirmed.

Legitimate expectation

33. As Mr Conolly's contention was a new point raised at the hearing, I gave leave for further arguments on this point to be raised in writing within ten days of the hearing. Mr Conolly raised no further arguments, but Mr Faulkner made written submissions on the issue of whether Demibourne had a legitimate expectation that regulation 49 determinations, if upheld, should be reduced by the tax that Mr Bone had paid on the disputed income. Mr Faulkner raised the following arguments:

(1) That the tribunal did not have jurisdiction to consider legitimate expectation.

(2) In the alternative, that the doctrine did not apply in this case, given the facts.

(3) That HMRC did not have jurisdiction within the statutory framework to choose whether to collect the tax from Mr Bone or Demibourne.

(4) That the statement relied on by Demibourne was made at a time when the Employer Compliance Officer had no reason to believe that her view was disputed and that the case would not be settled by agreement.

(5) That in relation to the issue of confidentiality, Mr Bone had indicated that he was not prepared voluntarily to disclose his income to Demibourne.

Discussion and conclusions

34. Both parties agreed that the proper approach in the light of Hall v Lorimer was to look at the facts overall and arrive at a complete picture, giving appropriate significance to each element. However, the respective conclusions that they drew from the total picture were radically different. This was the result both of different interpretations of the facts, and differing conclusions on the significance to be given to particular facts.
35. I have dealt with certain differences between the evidence given by the respective witnesses, and arrived at a view on the evidence to be preferred. I agree that I should review each element and consider its significance, then look at the cumulative picture.
36. Clearly, Mr Bone had been an employee until his retirement. In addition, Demibourne took him on as an employee after the disputed period, although it may have taken the view that it was doing so "under protest". Of itself, his earlier treatment as an employee would not automatically indicate his status from April 1993 to April 2002. Mr Conolly cited Massey v Crown Life Insurance Co [1978 1 WLR 676, in which a branch manager of an insurance company who had previously been an employee entered into a new agreement with the company under which he would continue to perform the same duties as previously but would be self-employed.
37. I accept that it is possible for someone previously engaged as an employee to become an independent contractor working for the former employer. However, to achieve this, there needs to be a clear distinction between the employer/employee relationship and the new one amounting to a contract between client and independent contractor. In Massey, the individual was regarded as having succeeded in changing the nature of the relationship (and therefore preventing himself from making an unfair dismissal claim). There were two major distinctions between that and the present case. First, there was a written contract (even though the duties were similar to those under the previous arrangements). Secondly, the Court of Appeal raised the question whether the previous arrangements (or at least part of them) amounted to a contract for services rather than an employment contract.
38. In the present case, the terms of Mr Bone's engagement from April 1993 were very similar to those of his employment up to that time. Was there a sufficiently clear distinction between the terms of the engagement and those of the previous employment to demonstrate that the engagement was of a different character?
39. The first change was to the terms of payment, with Mr Bone being paid on the basis of weekly invoices rather than under the PAYE system, and dealing with his tax on a self-employed basis. I view this as a consequence of the way that the parties viewed the relationship, rather than as a factor defining its nature.
40. Secondly, Mr Bone was no longer entitled to paid holidays. In addition, although there was no formal record of the terms, Demibourne considered that the engagement was terminable without notice. Mr Bone expressed no view on this, but accepted the basis of the engagement. Further, Mr Bone's name no longer appeared on the daily rota sheet.
41. Apart from these changes, the basis of Mr Bone's engagement was, in terms of the conduct and practice of both parties, virtually identical to the terms on which he had been employed up to the date of his retirement. He worked at the hotel for similar hours before and after that date. Afterwards he provided his tools, as he had done as an employee. The nature of his work was such that neither before nor after April 1993 was he subject to detailed supervision of the way in which he carried it out. The hotel indicated the general nature of the work required, and Mr Bone had some discretion to decide what additional work needed to be done within the time available. I am not satisfied that there is any evidence of a right to bring in helpers or substitutes, although I agree with Mr Conolly that it is doubtful whether such a right would be significant in the context of a retired person carrying out work for his former employer. Mr Bone had to purchase some goods in his own name for the hotel and obtain reimbursement; there was no evidence of what the practice had been up until April 1993. Apart from this, the extent of the financial risk that he undertook was to wait for the hotel to pay the weekly invoices; this was very similar to waiting for his wages to be paid under the previous regime. Despite the wording endorsed on his invoices by rubber stamp, he could not really be said to have been in business on his own account; the amount of work that he carried out for other persons was relatively small, and not organised on a commercial basis.
42. Taking all the factors together, I do not consider that the changes made in April 1993 were sufficient to replace the relationship of employer and employee with one between client and independent contractor. I hold that for the disputed period from April 1993 to April 2002, Mr Bone was an employee of Demibourne. Mr Conolly argued that the intention of the parties was particularly relevant, citing McCullough J in Swan (Hellenic) Ltd v Secretary of State for Social Security [1983] QB (18 January, unreported):

"Clearly, the greater the court's confidence in the bona fides of the parties the greater must be the significance which attaches to a clear expression of intention that the relationship would be that of employer and independent contractor."

43. Although the parties' intention may be a significant factor, it cannot on its own determine the nature of the relationship. Indeed, McCullough J refers in the paragraph before the passage cited above to the acceptance by the Court of Appeal in Ferguson v John Dawson & Partners [1976] 3 All ER 576 that " . . . an expression of intention may be relevant in a doubtful case", as well as to remarks of Lord Denning M.R. in Massey to the effect that where a relationship is capable of being of either type the agreement may be the best possible guide from which to gather the true relationship.
44. In the present case the overall picture arrived at by taking into account all the relevant factors is not such as to require intention to be considered in order to resolve doubt or ambiguity. Whatever the parties may have believed that they were doing in arriving at the agreement concerning Mr Bone's engagement, the overall effect of the contractual terms, taken together with the course of conduct as between the parties, was to continue a relationship of master and servant.

PAYE

45. Mr Connolly argued that HMRC should have made a direction under regulation 42(2) of the Income Tax (Employments) Regulations 1993 so that the tax was recovered from Mr Bone. I accept Mr Faulkner's argument that the decision by the collector whether or not to exercise his discretion under this regulation is outside the jurisdiction of the tribunal; the appeal powers under these Regulations are more restricted than those replacing them from 6 April 2004. In any event, Demibourne did nothing to satisfy the collector that the failure to deduct PAYE was due to an error made in good faith, so it is difficult to see how a direction could have been appropriate.
46. Mr Connolly also questioned the validity of HMRC's determinations under regulation 49. I understood him to accept that such determinations could only be challenged by means of judicial review, as for a decision not to make a direction under regulation 42(2). Again, these matters are outside the jurisdiction of the tribunal.

Legitimate expectation

47. Mr Faulkner's primary submission was that the tribunal did not have jurisdiction to consider legitimate expectation. In support of this, he cited my decision in Marks v McNally (SpC 428, reported at [2004] STC (SCD) 503), in which I said at paragraph 47:

" . . . and if it were appropriate for the Appellant to raise the question of legitimate expectation, this could only be done through the courts, rather than through this tribunal."

48. Nothing put to me in the course of the present case gives me any reason to depart from that view. Although this determines the question, I consider briefly Mr Faulkner's further submissions, in case my view is not upheld. On the facts, I agree that any possible expectation based on Mrs Emblem's letter dated 31 January 2002 (paragraph 28 above) was removed by a letter dated 8 September 2003 from Mrs Hannington, the HMRC Status Inspector, indicating that if an offer to settle informally was not accepted, HMRC would seek to recover the tax as well as the National Insurance.
49. Although I accept Mr Faulkner's contention that HMRC does not have discretion to choose whether to collect tax from Mr Bone or Demibourne, I do have some concerns about the consequences of taking this argument to its logical conclusion. I agree that the regulations are based on the principle that it is the employer, rather than the employee, who is responsible for deducting tax and accounting for it to HMRC, the only exceptions being direct collection and direct payment cases, and directions under regulation 42(2) or (3). The first two are not relevant here, and directions under regulation 42(2) have been considered above. (The Status Inspector had considered referring the case to a collector to consider making such a direction, but had decided that the conditions for making a direction were not met.) Demibourne did not suggest that regulation 42(3) should have been invoked. As Mr Faulkner contended, neither of these provisions was available once a regulation 49 determination had been made. I accept his argument that regulation 49(5), which allows a direction to collect tax from an employee where the employee knows of the employer's wilful failure to deduct PAYE from his earnings, does not apply here. I also agree that there is no provision in regulation 49 for the amount determined to be anything less than the PAYE due on the full amount of Mr Bone's wages.
50. Mr Faulkner argued that regulation 101(4)(a) required HMRC to give the employee credit in his assessment for "any tax which the employer was liable to deduct from the employee's emoluments but failed so to deduct"; it followed that Mr Bone was entitled to a PAYE credit in his self-assessment of the full amount that should have been deducted by Demibourne, whether or not the tax was recovered from Demibourne. Mr Bone was also entitled to make an error or mistake claim under section 33 of the Taxes Management Act 1970 because he incorrectly included his income from Demibourne under Schedule D on his self-assessment return, and so could claim repayment of the Schedule D tax. It followed that the effect of reducing the regulation 49 charge by the Schedule D tax would be that HMRC lost its right to collect it from any person. If it were held that Demibourne had a legitimate expectation that it did not have to pay part or all of the regulation 49 determinations, it would not give effect to the Employer Compliance Officer's statement that "it is not Revenue practice to charge tax twice"; it would mean a complete loss to the Exchequer of the tax paid by Mr Bone.
51. My concern about these arguments is that they do not wholly reflect the position in practice. It is too late for adjustments to be made to Mr Bone's assessments for the earlier years covered by the determinations, or for him to make error or mistake claims for the earlier years. For those years, therefore, the effect of the determinations will be that tax is being accounted for twice, once through Mr Bone's self-assessment covering his Schedule D profits, and again through the determinations based on estimated amounts of his earnings. It would be preferable for the determinations confirmed by this decision to be adjusted by negotiation between the parties and Mr Bone so as to allow for the tax already paid by him to the extent that it is incapable of adjustment. Ideally agreement should also be reached on a basis for dealing with the tax for the subsequent years. Rather than adjusting the tax already paid by Mr Bone (and possibly leaving him open to an action by Demibourne for recovery of amounts paid to him on the basis of a mistake of law, as suggested by Mr Conolly) it would be better for the tax due from Demibourne in respect of the determinations to take into account tax paid by Mr Bone for those later years also, and for the tax paid on the basis of his self-assessments to be left undisturbed. However, this is a matter for the parties, and not within the jurisdiction of this tribunal.

Summary

52. The appeal against the decision relating to secondary Class 1 contributions and against the PAYE determinations is dismissed. The tribunal does not have jurisdiction to consider legitimate expectation, but had it done so, Demibourne's claim would have been rejected. The parties are encouraged to arrive at a negotiated settlement to take account of the tax that Mr Bone has already paid.

JOHN CLARK

SPECIAL COMMISSIONER

RELEASE DATE: 23 June 2005

SC/3068/2004

Authorities referred to in skeletons and not referred to in the decision:

Barnett v Brabyn [1996] STC 716

O'Kelly v Trusthouse Forte [1984] QB 90

Kleinwort Benson v Lincoln City Council [1999] 2 AC 349

Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173

Lee Ting Sang v Chung Chi-Keung [1990] 2 AC 374

Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612