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Cite as: [2007] UKSC SPC00599, [2007] UKSC SPC599

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Parade Park Hotel & Anor v Revenue & Customs [2007] UKSC SPC00599 (05 March 2007)

SPC00599

Income tax – PAYE determinations – whether individual an employee – no

National insurance – status decision – whether individual an employed earner – no

THE SPECIAL COMMISSIONERS

PARADE PARK HOTEL (1)

PAUL MAY (2) Appellants

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Special Commissioner: JOHN CLARK

Sitting in public in London on 14 December 2006

Dave Smith, Chartered Tax Adviser, Accountax Consulting Ltd, for the Appellant

Chris Cumming, Appeals Unit, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

These appeals concern an employment status dispute. The first Appellant, Parade Park Hotel ("PPH") and the Second Appellant, Paul May, contend that Mr May was an independent contractor carrying out work for PPH. The Respondents (referred to for all relevant periods as "HMRC") contend that Mr May was employed by PPH. The dispute relates both to National Insurance Contributions ("NICs") and income tax. A Direction was made that the appeals of PPH and Mr May should be heard together.

The facts

The evidence consisted of a bundle of documents, together with witness statements given by Mrs Nita Derrick and Mr May; Mrs Derrick and Mr May also gave oral evidence. The bundle contained a statement of facts not in dispute. On the basis of the evidence I have found the following facts; where there was any dispute as to the facts, I consider the disputed matters later in this decision.

PPH is a partnership between Mrs Nita Derrick and her husband David Derrick. Mrs Derrick had purchased the hotel business in 1996. At the time, David Derrick carried out some of the maintenance work. In 1999, PPH started an expansion project, as a result of which about 35 rooms required painting and decorating. A firm named ABC Builders was hired to carry out the decorating work. The work was initially carried out by three individuals; these were someone called Steve (who owned the business), Mr May and Paul Kain. All three of them were self-employed painters and decorators. Before the work had been completed, Steve decided to close the business down, giving PPH only a week's notice that he would be doing so. As PPH had been "let down" and the work had not been finished, Mrs Derrick approached Mr May and Paul Kain and asked them if they would stay on until the work was complete. They agreed, and quoted an estimated price for the remainder of the work; they decided how much they could do. The whole job took about two months to complete.

At some time before the middle of 1999, Mr and Mrs Derrick separated. Mr Derrick moved out and Mrs Derrick continued to run the hotel by herself; Mr Derrick remained a partner in the business. Although initially she did not think that she would need any help, because all the rooms had recently been revamped, it soon became clear that help would be required. As Mr Derrick had always dealt with the maintenance, PPH did not have an employed maintenance man on its books. Mrs Derrick approached Mr May to ask him to carry out another decorating job; he agreed, and quoted a price for completion of the work. Later Mrs Derrick realised that there were various other maintenance jobs that also required attention, so she offered Mr May some of the general maintenance work, and he agreed. Initially he quoted a price for each task; he could not remember whether the quotations at the beginning had been in writing, but later quotations were given by word of mouth.

Subsequently Mr May stopped providing quotations to Mrs Derrick, and she agreed to pay him on the basis of a daily rate rather than pricing each job separately. (Initially the rate was £65, and in February 2002 it was increased to £70.) Mrs Derrick realised that Mr May would in her view be "unemployable" as he would often be unreliable if he had a hangover. During the period under appeal, there was no written contract governing the arrangements between PPH and Mr May.

Initially Mr May worked for a total of five days a week, but later this changed to three days, five days or nothing in a week. (The records of PPH's payments to him are considered below.)

The maintenance jobs needing to be done were listed in a maintenance book, which was checked regularly by Mrs Derrick and Mr May. He also carried out regular checks around the hotel and identified problems needing attention, which he then mentioned to Mrs Derrick as suggested additional work. He would decide what he wanted to do, and would work through the list in the order which he decided. He had the discretion to refuse to do any of the jobs on the list. The types of work which he refused were electricians' work, plumbing and building, and generally anything outside the category of easy or routine maintenance; he did not carry out tasks for which he did not have the knowledge or expertise. He also refused to do wallpapering. Mrs Derrick could not require him to stop one particular task and move to another; she could only ask him to do so, for example where an emergency job required Mr May's urgent attention. She accepted any of his refusals to carry out particular maintenance tasks and would simply deal with the tasks herself or find other people to deal with them.

Mrs Derrick considered it her duty to make a general check of the hotel facilities, especially before the weekend, so was aware of what work Mr May had done; she accepted the description which Mr May had given of her at a meeting with HMRC, that she was "a bit of a Rottweiler". She kept tight control over the whole hotel.

As well as being able to choose what work he would or would not do, Mr May could also decide which days he would come to the hotel to carry out the work. Initially he appeared to Mrs Derrick to be reliable, but after a while, she realised that he would often not arrive to deal with a particular task. He often had a hangover after consuming too much alcohol. He suited himself when he would turn up. Mrs Derrick accepted this arrangement without complaining to him and continued to use him for the work, as he was not expensive and the cost for PPH was not unreasonable.

Mrs Derrick accepted that it was Mr May's decision as to whether or not he wanted work. She considered that he had the freedom to choose the hours he worked, and she did not tell him when to work or what to do.

As Mr May was not required to work set days or hours, he often tried to make the work fit within the days which he worked. His choice of what hours and what days to work was often influenced by his alcohol problem. The time taken to complete all the jobs on the maintenance list varied, depending on the number and size of jobs on the list. He accepted that if he did not turn up because he did not wish to do certain jobs, he would not be paid. There was a period when Mr May considered that the work for PPH had "dried up"; during this time he did work for other clients.

It often happened that Mr May said that he would be coming to the hotel and failed to turn up. During the relevant period there were times when he would not turn up for weeks, and other times when he would come, but not necessarily when he had said that he would.

Mrs Derrick gave Mr May permission to hire an assistant if he needed someone to help him carry out some of the jobs, although nothing was agreed in writing. On one occasion when wallpapering needed to be done, Mr May arranged for Paul Kain to come in and deal with the job while Mr May assisted. Mrs Derrick paid Paul Kain direct, as this was easier for Mr May's books. There had been no occasion on which PPH had paid Mr May for work done by anyone else. Mrs Derrick would have needed to vet any person working at the hotel as a substitute for Mr May, and would need to be assured that the person was honest, as security was important in a hotel. She would have asked how Mr May knew the person. She felt that she would be able to accept a suitable substitute. Mr May stated in evidence that he would not have sent anyone whom he did not trust.

Mr May was not required to attend for specific hours. He attended when he wanted, normally arriving between 8 and 9 am, but sometimes not until 10.30 am, and normally left at some time between 5 and 7 pm. When he did attend, he worked until he had finished the items on the maintenance list which he had decided to deal with. He considered it advisable to complete the work, as there was a risk of Mrs Derrick deciding to stop providing any more work for him to do. She took a general global view of his hours, although she was not aware of the precise actual hours for each day. Normally he did not attend for short periods such as one hour, as fuel costs would have made this uneconomic. Mr May considered that Mrs Derrick expected a reasonable amount of work for the amount paid; what mattered was the amount of work, not the total of hours worked. For some of the work, the hours were dictated by the times when the rooms were vacant. Routine maintenance work could be fitted in between work on the rooms, or left to another day. On some occasions Mr May would split a day.

Mr May could decide what jobs he wished to carry out on a particular day if he wanted to finish early. If there was an emergency job which urgently required his attention, Mrs Derrick could ask him if he wanted to undertake the job but could not make him. Although his work was generally very good, there had been some occasions when she had had to ask him to put right work which was not satisfactory. Sometimes this had required him either to be at the hotel outside normal working hours or to travel back to the hotel outside working hours; this was in his own time and at his own expense. He made it clear that he was not generally paid anything extra for putting these matters right, although it had happened once in a year that he had been called out outside working hours to do extra work, and this had been added to his hours for the following week.

In the light of the arrangements between PPH and Mr May, Mrs Derrick did not feel obliged to offer him any work, nor did she expect him always to turn up. This flexibility worked both ways. At the beginning she telephoned Mr May to tell him about available work; later the position was that more often than not, work was available, so he would go to the hotel on the assumption that there would be work for him to do. If there was work, it was reasonable to expect that he would be paid for doing it; he would not do further work for anyone who had failed to pay him for work which he had done. He would not bill for a day's work if he did not do anything; the way the arrangement with PPH worked was that if a job was done, it would be paid for.

There were some occasions when Mrs Derrick had no work for him to complete, so she would telephone him to let him know that he was not needed. Usually, however, there was work available for him to do. For his part, Mr May was very unreliable and would either unexpectedly turn up or would not turn up at all. Mrs Derrick was aware that this was a result of his serious alcohol problem. (Mr May candidly acknowledged in his oral evidence that he was a self-confessed alcoholic.) At one stage Mr May was absent about once a week on a regular basis, but this had now reduced to about once a month. Because of the nature of the arrangement Mrs Derrick did not warn him about his behaviour. He was a good worker when he turned up and was familiar with the hotel building.

Mr May had his own car and motor bike, and did not use Mrs Derrick's van. He used his own tools such as steps, brushes and screwdrivers and provided his own clothes. He had his own ladder; when he had to bring in larger items, he used his car, but normally he used his motor bike to travel to the hotel. He did not use PPH's own equipment, which was locked away. His accounts showed expenditure of £1,600 on equipment. PPH supplied the materials because this was cheaper and PPH could reclaim the VAT on such items, whereas Mr May could not do so as he was not a registered taxable person. Occasionally he purchased small items and was reimbursed the cost by PPH; Mrs Derrick either gave him cash or a cheque, depending on the amount involved. These payments were made separately from the payments for his work. Any materials left over belonged to the hotel. He did not receive holiday pay from PPH, did not have to request permission to take holidays, and was not required to inform Mrs Derrick that he was not coming in. He did not receive sick pay from PPH, and was not entitled to partake in any grievance or disciplinary procedures. During the period under appeal, he did not have his own liability insurance cover. He mentioned work done for other clients; this is considered below.

For the period covered by this appeal, the arrangements between PPH and Mr May were not documented in writing; the only written items relating to Mr May's work were his invoices. These were typed up by whichever member of PPH's staff was at the hotel reception at the time; one copy was provided for PPH, and he kept another for his accounting records.

Mr May explained that during periods when he was not working, he was supported by his partner Catherine. During these quiet periods he would often go fishing and did not feel particularly concerned as long as he had enough money for cigarettes and alcohol. He assumed that Mrs Derrick was happy with his work, as he was still doing work at the hotel. He indicated that if the arrangement between him and PPH were to be regarded as an employment relationship, he would immediately cease to carry out any further work for PPH.

Mrs Cumming provided, as an Appendix to her skeleton argument, an analysis of the payments to Mr May. As this was based on the records contained in the bundle, I accept it as a basis for reviewing the figures for the payments to him. The pattern of payments as shown in PPH's records was that for the majority of weeks from July 1999 to 30 April 2000, he was paid for a five day week. (During this period, which included three quarters and a few additional weeks, 39 payments were made.) For some weeks the amount paid reflected four days' work. A few of the payments were greater than an exact multiple of £65. In some cases where the total was exactly £32.50 more than the rate for an exact number of days, this may well have reflected additional half days. In other cases, the additional amount in excess of the rate for days plus any half days may have been reimbursement of expenditure or payment for extra work. However, there was no specific evidence to establish the exact reason for the additional amounts.

The total paid by PPH to 5 April 2000 was £11,090, whereas the accounts prepared by Mr May's accountant showed turnover of £13,365.

For the quarter to 31 July 2000 the twelve payments corresponded to between four and five days a week. For the following quarter, most of the thirteen payments were either at the four day rate or the five day rate, although the payment for one week was at the rate for only two days. Again, some figures for that quarter did not correspond to the rate for a number of days (with or without a half day). The position for the nine payments in the quarter to 31 January 2001 was similar, but with two odd smaller amounts. For the ten payments made in the quarter ending on 30 April 2001, the rate was mostly that for between four and five days, with one week at the three day rate. The records produced by Mr May's accountant were different; they showed two payments in that quarter, one at the four day rate and one at a rate corresponding to four and a half days. Mr May's accounts for the year ended 5 April 2001 showed turnover of £12,991, which differed slightly from the cumulative total shown in PPH's records.

Of the six payments made in the quarter to 31 July 2001, three were at the three day rate, one at the four day rate, one at the five day rate and one at a rate corresponding to four and a half days.

For the next two quarters there were differences between PPH's records and those produced by Mr May's accountant. In the quarter to 31 October PPH showed seven out of eleven payments at the three day rate, three at the one day rate and one at the two day rate. The accountant's records showed a single amount of £260, which may correspond to the last three payments recorded by PPH, but then the records included four further amounts. For the quarter to 31 January 2002, both sets of records showed one payment of £65 made on 9 November 2001, but the accountant's records also showed seven further payments. Mr May's accounts to 5 April 2002 show turnover of £7,842, whereas the figure for PPH's payments to 5 April 2002 is £5,737.50. (I will comment later in this decision on these discrepancies.)

The quarter to 31 April 2002 reflected the revised day rate of £70. Both sets of records correspond. There were thirteen payments, ten at the three day rate, and three at the two day rate. For the next three quarters the two sets of records continue to correspond. Of the twelve payments made in the quarter to 31 July 2003, five were at the three day rate, five at the two day rate, and the other two were "odd" amounts of £260 and £94. Twelve payments were also made in the quarter to 31 October 2002, nine at the three day rate, one at the two day rate, and two odd amounts of £170 and £70 respectively. In the quarter to 31 January 2003, all eleven payments made were at the three day rate.

The records for the payments up to 30 April 2003 diverge. PPH's records showed twelve payments, eleven at the three day rate and one at the five day rate. Those produced by Mr May's accountant showed eight payments, seven at the three day rate and one at the five day rate. However, the annual amount shown as turnover in Mr May's accounts to 5 April 2003 and PPH's cumulative total as at the end of this quarter (ie to 30 April 2003 rather than 5 April 2003) were identical at £9,344.

PPH's records for the following three quarters plus the period to 5 April 2004 showed, respectively, thirteen, twelve, nine and six payments. Of the forty payments, thirty-two were at the three day rate. Of the remainder, one was at the five day rate, one at the four day rate, one corresponded to the rate for three and a half days, one to that for two and a half, and one at the two day rate; there were odd amounts of £190, £187 and £200. The turnover shown in Mr May's accounts to 5 April 2004 was £9,747, whereas the total payments shown in PPH's records for the year to 5 April 2004 amounted to £9,327. If all the payments recorded by PPH for the period under appeal are totalled, the amount is £48,286.98, whereas the gross turnover shown in Mr May's accounts for the relevant years to 5 April is £53,289.

On 13 January 2004 a meeting was held between two HMRC officers, Mrs Derrick and her accountant Mr Purcell. HMRC prepared a note of that meeting. In a covering letter dated 16 January 2004, Mr Hurford (an Employer Compliance officer) stated: "If I do not hear from you in, say, two weeks, I will assume that the Summary, as written, is acceptable to you." No specific reply to that letter is contained in the documents bundle. On 19 January 2004, Mr Purcell wrote to Mr Hurford with schedules of amounts paid by PPH to Mr May from July 1999 to 31 October 2003.

On 23 January 2004 there was a meeting between the same HMRC officers, Mr May and his accountant Mr Evans. The note of this meeting states that it was prepared on 30 January 2004 from notes prepared on 23 January. This note was enclosed with a letter from Mr Hurford to Mr May dated 29 January. Meanwhile, on 23 January, Mr Evans wrote to Mr Hurford with schedules itemising Mr May's income from PPH for the two years to 5 April 2003. Mr May returned the letter and the note of meeting to Mr Hurford with annotated comments both on the letter and the note of meeting. On 9 February 2004 Mr Evans wrote to Mr Hurford with a number of comments, requesting that these should be incorporated in a revised version of the note. No revised copy of this note was contained in the bundle; I therefore find, in the absence of any indication to the contrary, that the note was never amended.

In a letter dated 12 February 2004, Mr Hurford wrote to Mrs Derrick at the hotel. This letter set out the "pointers to employment", the "pointers to self-employment", and neutral factors. Mr Hurford concluded that Mr May was an employee and that PAYE should be operated for the purposes of income tax and NICs. In her letter dated 16 February 2004, Mrs Derrick responded with detailed comments indicating that she did not agree with this conclusion.

A meeting took place on 6 May 2004 between Mr Gretton (a Status Inspector for HMRC), Mr Hurford, Mrs Derrick and Mr Purcell. Mrs Derrick wrote the next day with comments on that note.

Following the supply by Mrs Derrick of further details of payments to Mr May up to February 2004, HMRC wrote on 6 January 2005 to PPH and to Mr May with a Notice of Decision that for NIC purposes Mr May was an employed earner in respect of his engagement with PPH for the period from 6 April 1999 to 5 April 2004. The Notice was addressed to "The Parade Park Hotel", and showed PPH's liability in respect of Mr May's earnings as £7,188.25. Mr Purcell wrote on 4 February 2005 to appeal against the Notice of Decision. Subsequently, Mr May also appealed against this Notice; the date of his appeal was 27 February 2006.

Determinations under regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) for the years 1999-00 to 2003-04 inclusive were issued on 4 April 2005. These were addressed to "Mr DP and Mrs ND Derrick, The Parade Park Hotel". Although not stated on the face of the determinations, these related to the payments made to Mr May. On 12 April 2005 Mr Purcell appealed against these determinations. Following a subsequent application to the General Commissioners for the Bristol City, Bedminster and Wrington Division, jurisdiction in respect of these determinations was transferred to the Special Commissioners. Jurisdiction in respect of the Notice of Decision for NIC purposes was also subsequently transferred. On 19 April 2006 a Direction was made under regulation 7 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (SI 1994/1811) for Mr May's appeal to be heard together with that of PPH.

Arguments for the Appellants

Mr Smith raised a preliminary point concerning the validity of the Notice of Decision, in that it had been addressed to "The Parade Park Hotel", and not to the partners in that business. I consider this below.

The appeal related to the tax and national insurance status of Mr May in relation to his association with PPH. Mr Smith accepted that the onus of proof rested with the Appellants. The standard of proof was the balance of probabilities. As employment status was a mixed question of fact and law, it was necessary first to establish the facts of the relationship and then to identify and apply the correct legal principles to those facts.

Mr Smith submitted that the notes of meetings with HMRC had not been formally agreed and signed off by the interviewees, and correspondence had indicated several disputes as to what had actually been said at the meetings, with doubt being cast as to the accuracy of the notes produced by HMRC. He argued that the formal witness statements and oral evidence would prove to be more reliable sources.

Mr Smith reviewed the facts and the relevant factors; these are considered below.

Mr Smith referred to Ready Mixed Concrete v Minister of Pensions and National Insurance [1968] 2 QB 497, and to MacKenna J's indication at pp 439-440 of the conditions for a contact of service to exist. These were that there should be mutuality of obligations, that the worker should be subject to a sufficient degree of control to make the other party master, and that the other provisions of the contract should be consistent with its being a contract of service. In Nethermere St Neots Ltd v Gardiner [1984] IRLR 240 at 251, Stephenson LJ had referred to "an irreducible minimum of obligation on each side to create a contract of service", and applied this to MacKenna J's statement.

Mr Smith argued that there was no mutuality of obligations between the parties. At no time did Mrs Derrick have any obligation to offer Mr May work, nor was there any correlating obligation on Mr May to accept work and perform work.

Mutuality of obligations was concerned with whether there were obligations on the work provider to offer work, with corresponding obligations on the worker to accept and do the work. This should not be confused with a situation in which a worker merely in fact turned up and was then paid for the work undertaken. Mutuality referred to an obligation to accept and perform work. The House of Lords had referred in Carmichael v National Power plc [1999] 4 All ER 897 at p 902 to the case foundering "on the rock of absence of mutuality". Mr Smith argued that mutuality was a key differentiator between employment and self-employment.

HMRC were arguing that mutuality was necessarily established where work was simply undertaken and the worker was paid; this confused the true meaning of mutuality with mere consideration that flowed under any bargain. In Propertycare Ltd v Gower [2003] UK EAT/0547/03/GT at paragraph 9(3), His Honour Judge Peter Clark said:

"The cases starting with Ready Mixed Concrete show that mutuality of obligations means more than a simple obligation on the employer to pay for work done; there must generally be an obligation on the employer to provide work and the employee to do the work."

Mr Smith cited Park J in Usetech Ltd v Young [2004] STC 1671 at [60]:

"I would accept that it is an over-simplification to say that the obligation of the putative employer to remunerate the worker for services actually performed in itself always provides the kind of mutuality which is a touchstone of an employment relationship. Mutuality of some kind exists in every situation where someone provides a personal service for payment, but that cannot by itself automatically mean that the relationship is a contract of employment: it could perfectly well be a contract for free lance services."

Mr Smith argued that the necessary mutual obligations did not exist in the present case. It was not sufficient that Mr May turned up and was paid.

HMRC might argue on the authority of Cornwall County Council v Prater [2006] EWCA Civ 102 (reported as Prater v Cornwall County Council [2006] 2 All ER 1013) that it might be possible to have mutuality within specific contracts. Although he did not disagree with this as a broad statement, the principle acknowledged in that case was that mutuality might exist within one-off jobs. He argued that it was then necessary to consider whether in fact mutuality in fact existed in such one-off jobs. In that case Mrs Prater was obliged to complete a teaching assignment once she had accepted it; she had to perform what she had agreed to do once the work was allocated to her. This was not the case in the present appeal. There was never an obligation on Mr May to perform a specific job or day's work even where he had already indicated that he would do it. Not only did Mr May not have to turn up and do the work; there were many occasions when he simply failed to turn up.

Mr Smith cited Buckley J in Montgomery v Johnson Underwood Ltd [2001] EWCA Civ 318 (reported at [2001] IRLR 269). After citing Ready Mixed Concrete and Carmichael, Buckley J had expressed approval of MacKenna J's summary of the necessary conditions. Buckley J had also cited comments made by Waite LJ in McMeechan [1997] ICR 549 at [9]. Mr Smith also cited Brooke LJ at [47]:

"As Buckley J has shown, however, the concept of an irreducible minimum of obligations was expressly applied by Lord Irvine of Lairg LC, with whom the other members of the House of Lords agreed, in Carmichael v National Power plc [2000] IRLR 43, and there is a consistent line of authority contained in decisions of this court, binding both on this court and on inferior tribunals, to the effect that the three elements of a contract of service identified by McKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, 515 must be present before a contract of service can be identified, whatever other elements there may be which point one way or another."

Mr Smith submitted on the authorities that the need for mutual obligations (ie the obligation on Mrs Derrick to offer work and the obligation on Mr May to accept and perform it) was an essential pre-requisite for a contract of service, that such obligations were absent, and that the "irreducible minimum" had not been met. Mr May could not be an employee in these circumstances.

Mr Smith referred to the question of personal service and substitution. He argued that although a right of substitution was not a central part of the appeal, it had been shown that Mr May could have taken on (and on at least one occasion did take on) hired assistance. Mr May's use of Paul Kain introduced at least a doubt whether Mr May was always obliged to do the work personally. Looking at the whole situation, there was no evidence from Mrs Derrick requiring Mr May's personal service. Mr Smith cited Peter Gibson LJ in Express and Echo v Tanton [1999] IRLR 367, at the penultimate paragraph of his judgment.

In relation to the requirement for control, which was part of the "irreducible minimum", Mr Smith contended that on the evidence there was insufficient control by Mrs Derrick over Mr May to amount to a master/servant relationship; Mr May refused work, chose his own hours and was not interfered with by Mrs Derrick (who was not a skilled tradesman) and so Mr May had freedom over how he did the work. The aspects of the control test were where, what, when, and how the work was to be done. "Where" was neutral in the present case. "When" was left to Mr May; he decided when he would come in; once he did so, he did a fair day's work for a fair day's pay. In relation to "what", Mr May decided what he wanted to do, and there were various examples of him deciding not to carry out particular tasks; Mrs Derrick did not have control over this. Nor did she have control in relation to the question "how".

Although Mrs Derrick knew when Mr May was at the hotel, she did not supervise him. It followed that she had no control over any of the relevant factors.

If either mutuality of obligations or control was missing, it was clear from Ready Mixed Concrete and the other cases that Mr May could not be an employee.

An alternative approach, not universally approved, was to ask whether the person doing the work was "in business on his own account". This test had been developed in Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173. Of the factors considered in that case, the majority in the present case were in favour of the Appellants.

In Hall v Lorimer [1994] STC 23 (also reported at 66 TC 349 at 370) the Court of Appeal had highlighted the need to look at all the personal factors of the case and paint a picture from the accumulation of detail. Mr Smith contended, on the basis of the findings in that case, that it was not necessary for a worker to show provision of substantial equipment in order to defeat the argument that a contract of employment existed. In Barnett v Brabyn [1996] STC 716 it had been successfully contended for HMRC before the General Commissioners that it was quite possible for a person to be in business on his own account when all he supplied was his own services without providing any equipment or having any risk of loss of prospective profit.

Mr Smith argued that the intention of the parties was relevant, although he accepted that a mere label would not change the nature of an agreement. He referred to the final paragraph of Peter Gibson LJ's judgment in Express and Echo Publications v Tanton, and to the comments of Lord Denning MR in Massey v Crown Life Assurance Co [1978] 2 All ER 576 at 580a. In Barnett v Brabyn, Lightman J had referred to the terms of the agreement between the parties.

Mr Smith accepted that Mr May did not have a sophisticated business organisation or premises, nor public liability insurance for the period under appeal. He argued that in the context of the irreducible minimum, these factors were of very limited significance. He argued that Mr May had taken a financial risk in that he had had to put various items of work right in his own time and at his own cost. Mr May had also had to provide his own equipment.

He conceded that Mr May had had a working relationship with PPH for around ten years. However, longevity of such a relationship in itself proved nothing. It was possible to be an employee for one day if the terms agreed amounted to a contract of service. Equally, it was possible to be self-employed when supplying services to the same party for many years, so long as the irreducible minimum was missing, as it was in the present case.

In summary, in the core areas of lack of sufficient control and lack of the necessary mutuality of obligations, the irreducible minimum required for a contract of service was clearly absent from Mr May's working relationship with PPH. Several factors supported the contention that Mr May was "in business". There were virtually no significant factors that indicated a contract of employment. The relationship should be determined as being a contract for services. The appeals should be allowed and the Notices and Determinations discharged.

Mr Smith responded to various points made by HMRC. He argued that the evidence of Mrs Derrick and Mr May should be preferred to old HMRC notes of meeting which had never been agreed. The main issue was not whether there was a continuing obligation to provide work; the position was that Mrs Derrick was never obliged to provide work and Mr May was never obliged to carry out work. What was in question was mutuality of obligations, not of expectations. He emphasised that in relation to faulty work, Mr May carried the financial risk.

Mr Smith referred to the description in Prater at [11] of the nature of Mrs Prater's commitment once she had agreed to take on work. This was not the case here; Mr May was not obliged. Mrs Cumming had referred to "flexitime"; this was not supported by the facts. The relationship did not meet the irreducible minimum. The position was relatively unusual; a possible reason was Mr May's alcohol dependency.

In support of the contention that Mr May was in business, Mr Smith referred to Mr May's investment of approximately £1,600 in his own equipment, the liability to put right defective work, and the existence of other customers, producing a surplus of income of over £5,000.

Arguments for HMRC

Mrs Cumming indicated that there was broad agreement between the parties on the case law. She also referred to the three conditions mentioned by MacKenna J in Ready Mixed Concrete. Cooke J in Market Investigations Ltd v Minister of Social Security had suggested that the test was whether the person who had engaged himself to perform the services was performing them as a person in business on his own account, and had gone on to enumerate factors which might be relevant in answering this question. He had commented that no strict rules could be laid down about the relative weight of the various factors in any particular case. Hall v Lorimer established that, having considered all these individual factors in detail, it was necessary to stand back and consider the overall effect to determine the status of a worker; the process was akin to painting a picture in each individual case. Thus, Mrs Cumming argued, the cases provided a generalised approach; what was regarded as an important factor in one case might well be considered minor in another.

Mrs Cumming emphasised that in employment law cases, the approach was different; the question was whether the tribunal's decision was a possible one. Thus there were risks in comparing facts. She reviewed the specific factors considered in the various cases. These were control, financial risk and opportunity for profit, mutuality of obligation, the right to engage helpers or substitutes, basis of payment, provision of equipment, employee rights, personal factors, termination of contract, "part and parcel", and mutual intention. Evidence of little control did not mean that the engagement was conclusively one of self-employment; it was clear from Ready Mixed Concrete that what mattered was the right of control, not whether it was exercised. Cooke J had indicated in Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 at 183F that where an expert was involved, the lack of a right of control over how a job was to be done was neutral in determining employment status.

In relation to mutuality of obligation, Mrs Cumming pointed out that HMRC were not arguing that the mere payment in return for work amounted to mutuality. Each party had to bind itself to something; an arrangement where a party could choose the degree of involvement could not amount to a contract of employment. She referred to Prater. The issue was not whether there was mutuality of obligation from one engagement to the next, but whether it existed during a particular contract. The judgment made it clear that an absence of mutuality of obligation in the gaps between a series of separate employments did not convert the employments into a single period of self-employment.

She contended that to argue that there was no mutuality of obligation if an engager was not obliged to offer future work and the worker was not obliged to accept future work was tantamount to saying that a short-term engagement could not be a contract of service. This could not be correct; there could be mutuality of obligation in separate engagements, producing a series of contracts of employment. She emphasised that in Employment Tribunal cases the crucial question was often whether a worker had been continuously employed and for how long; a number of cases relied on by the Appellants were ones where there was a series of separate engagements with no mutual obligations between the engagements, and the workers were seeking employment rights. For tax and national insurance purposes employment status was usually decided on an engagement-by-engagement basis and so the obligation to provide future work was not relevant in the way that it might have been for Employment Tribunal cases. A decision in an employment case that mutuality of obligation did not exist at every point was not a decision that it did not exist at any point. The distinction was clear from the final paragraph of Lord Hoffmann's judgment in Carmichael. In Propertycare, for example, there had been no consideration whether an individual engagement would be an employment. Prater showed that there could be mutuality of obligation in separate engagements.

The existence of benefits such as sick pay or holiday was a pointer towards employment, but their absence did not necessarily indicate self-employment, as it was probably a reflection of how the parties viewed their relationship.

Mrs Cumming argued that some of the evidence was not reconcilable with contemporaneous statements, and suggested that less weight should be given to recent evidence. The meeting notes had been sent out for comments. Mr May, Mrs Derrick and both accountants had commented, so it was reasonable to assume that the notes were correct. The witnesses had indicated that they accepted the terms of these notes. She argued that there was no need for verification of the notes by calling the officers concerned to give evidence.

She reviewed the facts in the light of the principles which she had enumerated. Mr Smith had referred to the absence of any previous challenge to Mr May's self-employed tax status. She considered it more accurate to say that Mr May had submitted self-assessment returns on the basis that he was self-employed; the only action taken by HMRC had been to capture the data from those returns.

In the absence of a written contract, it was necessary to infer from the conduct of the parties the terms and conditions under which Mr May undertook work from PPH. HMRC accepted that Mr May was self-employed whilst working for ABC, and probably while he and Paul Kain were completing the job abandoned by ABC. However, at the point when Mr May was offered and accepted general maintenance work at the hotel, HMRC considered that his status changed to employee.

Mrs Cumming submitted that the control which Mrs Derrick exercised over Mr May was a pointer towards employment. HMRC contended that Mrs Derrick controlled what work Mr May did, how he did it, when he did it, and where. (The detailed contentions are considered in the discussion below.) Mrs Derrick was an astute businesswoman and controlled everyone, not just Mr May. Taking into account other factors and the general picture, Mrs Cumming argued that Mrs Derrick had sufficient control over Mr May for the relationship between them to amount to a contract of service.

The pattern of payments shown in the Appendix indicated that Mr May worked regular days for regular pay. Mrs Cumming contended that Mrs Derrick controlled when Mr May worked; flexibility of working was part of the accepted arrangement. This was no different from any employee choosing to reduce his hours. The choice might be a matter of the terms of the contract. The statement that Mr May came and went as he pleased conflicted with the regularity of payments to him. Mrs Cumming accepted that where there were gaps in the record, the contract may have ceased. She argued that Mr May turned up to do a specific number of days' work for a week. Mrs Derrick would expect him to do more than an hour's work. Both Mrs Derrick and Mr May had acknowledged that if he turned up, there would be work for him to do.

In relation to financial risk and opportunity for profit, Mrs Cumming argued that the evidence pointed towards employment. Mr May was unable to make a profit on materials; she accepted that for VAT reasons, it suited PPH to pay for the materials itself. Mr May was paid a daily rate, so could not lose money on a contract. She argued that on the evidence of his income, he had not worked elsewhere. The examples given of unsatisfactory work which Mr May had had to put right were not material and were no more than would be expected of an employee. Mr May did not suffer any financial risk other than that which an employee would have. She contended that he did not have any of his own money invested in his own business or PPH; he had no capital at risk.

HMRC submitted that there was the necessary mutuality of obligations between PPH and Mr May for a contract of service to exist. Mrs Derrick did offer Mr May work and he accepted it. PPH paid him for the work which he did himself. Mrs Cumming argued that this was all that was needed for the period of the contract, whether that was a single day or many months. It suited Mr May to stay with PPH as there would always be general maintenance work in a busy hotel. As he was a good worker, Mrs Derrick accommodated his hours (which offered him time to work on his own house or to go fishing) and his problem with alcohol. HMRC submitted that even though Mrs Derrick may not have had to offer work to Mr May, in reality there appeared to be an expectation that work would be given to him, as evidenced by the length of time he was engaged to work at PPH and the regularity of the payments made to him.

HMRC submitted that Mr May had no right of substitution. Whilst this was not conclusive on its own, it was a pointer towards employment. Another pointer was the basis of payment. Mrs Cumming argued that the schedule of payments in the Appendix to her skeleton argument showed that more often than not, Mr May worked regularly at the hotel and was paid regular amounts. The number of days to be worked each week and the amount paid might have been negotiated by Mr May and Mrs Derrick at the start of each contract, but that was no different from a normal employee agreeing his rate of pay before starting work, or negotiating an increase while he was working for an employer. She argued that on the facts the income from PPH was Mr May's only income. Although there were difficulties in reconciling the payments by PPH with the amounts shown by Mr May in his self-assessment returns, the comparison suggested that he had not worked for anyone else.

The absence of sick pay, holiday pay, grievance or disciplinary procedures was a neutral factor. The provision of equipment was a slight pointer towards self-employment. The absence of a notice period was probably neutral. Mrs Cumming submitted that Mr May was well integrated into PPH's organisation, and that this factor pointed towards employment. Although the mutual intention of PPH and Mr May was that he should be self-employed, she contended that the relationship between them was not ambiguous and that other factors pointed towards employment, so that the intention of the parties was not significant in the present case.

The onus was on PPH and Mr May to persuade the Tribunal that, on the balance of probabilities, Mr May was self-employed. Taking into account a number of factors pointing towards employment, when the Tribunal "painted the picture", what emerged was a contract of service rather than one for services. The appeal should be refused in principle.

In the course of compiling the Appendix, it had become clear that when the inspector made the section 8 decision and the regulation 80 determinations, he had treated 30 April as coterminous with 5 April. He had also used the starting date of 6 April 1999 on the section 8 decision, whereas the precise date was not known and seemed more likely to have been around 1 August 1999. It followed that the amount of duties would need to be adjusted. Mrs Cummings suggested that if the Tribunal found for HMRC in principle, it would be sufficient for it to determine the date on which the employment first started, leaving the parties to agree the amounts.

Discussion and conclusions

The parties did broadly agree on the case law. However, they differed in their view of the application of the principles to the facts of the present case. They also differed in their interpretation of the evidence.

In Ready Mixed Concrete, MacKenna J said ([1968] 2 QB at p 515):

"A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service."

Mr Smith indicated that the first condition referred both to mutuality of obligation and personal service. In Montgomery v Johnson Underwood at [23] Buckley J in the Court of Appeal, having expressed his approval of Stephenson LJ's comments in Nethermere, said:

"For my part, I regard the quoted passage from Ready Mixed Concrete as still the best guide and as containing the irreducible minimum by way of legal requirement for a contract of employment to exist. It permits Tribunals appropriate latitude in considering the nature and extent of "mutual obligations" in respect of the work in question and the "control" an employer has over the individual. It does not permit those concepts to be dispensed with altogether. As several recent cases have illustrated, it directs Tribunals to consider the whole picture to see whether a contract of employment emerges. It is though important that "mutual obligation" and "control" to a sufficient extent are first identified before looking at the whole."

Thus the questions of mutuality of obligation and control must be considered first before looking at the question whether the person engaged to perform the services is doing so as a person in business on his own account (Cooke J in Market Investigations), and before standing back and considering the overall effect of all factors relating to the engagement (Hall v Lorimer).

Before considering the terms of the relationship between Mr May and PPH, it is necessary to comment on the evidence. As there was no written contract between the parties during the relevant period, the terms of the arrangements have to be inferred from the dealings between the parties, and from any other surrounding evidence. Mrs Cumming argued that the notes of the meetings with HMRC were appropriate evidence, and that it was not necessary for the relevant HMRC officers to be called to give evidence. She sought in cross-examining Mrs Derrick and Mr May to obtain their confirmation that they agreed with the notes.

I do not feel that it is appropriate to treat these notes as uncontested accounts of contemporaneous discussions. In his letters dated 16 January 2004 and 29 January 2004 Mr Hurford said that if he did not hear from Mrs Derrick and Mr May respectively within, say two weeks, he would assume that the summary notes were acceptable to them. I have some doubt whether a party can be bound by default in this way to treat the note of a meeting as definitive; it is arguable that in order to be bound, the party in question must specifically assent. If such notes are to be relied upon as evidence, it is safer to obtain specific agreement. In the event, both Mrs Derrick and Mr May made it clear at the time that there were points in the notes with which they did not agree, and Mrs Derrick also referred to omissions. No attempt was made following these comments to correct the notes and obtain the agreement of Mrs Derrick and Mr May to revised versions of the notes. I therefore consider that, as Mr Smith argued, I should give less weight to the uncorrected notes than to the evidence given by Mrs Derrick and Mr May, both in their witness statements and orally at the hearing.

Did the terms of the relationship between Mr May and PPH amount to the "irreducible minimum"? Mr May's evidence was that he did not have to accept work from PPH, and could pick and choose the jobs which he wanted to do; if there was a particular job which he did not want to do, he would refuse to do it, and there was no obligation on him and no question of any complaint or disciplinary procedure. If he did not turn up because he had refused to carry out certain jobs, the only consequence was that he would not be paid. He did not have to work set days or hours, and would try to fit the work within the days he did work; his alcohol problem would often influence the days and hours worked. He stated that there had been a point when the work "dried up", during which he undertook work for other clients. He was able in cross-examination to remember the name of one client, John Hodge; however, he could not remember without looking at his books (which were not part of the bundle of documents for the hearing) when he had done work for John Hodge, nor to identify what work was done for PPH or other persons.

Mrs Derrick's evidence was that the nature of the relationship was such that she did not feel obliged to offer Mr May any work, nor did she expect him always to turn up; it was his decision whether or not he wanted work. He made his own decisions on what days he worked, even though she had her own preferences; he would suit himself when he turned up. He had the freedom to choose the hours he worked, and she did not tell him when to work or what to do. The understanding was that if Mr May did work, he would be paid. He stated in evidence that if he had not been paid for particular work, he would immediately have ceased to carry out any further work for PPH.

Mrs Cumming argued that the amounts shown in the Appendix demonstrated that Mr May was putting in regular days for regular pay, and that this was no different from any employee choosing to reduce his hours; the choice might be a matter of the terms of the contract. The argument that Mr May could come and go as he pleased conflicted with the regularity of payment. She accepted that where there were gaps, a contract of employment may have ceased. However, if there was no ongoing mutuality of obligation for the gap periods, the test should be considered for each day worked. Mr Smith had accepted in his skeleton argument that it might be possible to have mutuality within one-off jobs.

I react with caution to the argument that the pattern of payments amounts to evidence of the nature of the contract. It is possible to envisage situations in which a self-employed person or partnership could continue for many months or years to provide services to a client for remuneration based on the time spent working for that client rather than being paid an overall "rate for the job"; the regularity of payment would not in itself be an indication of the status of that person or partnership in relation to that client.

At most, the history of payments in the present case is a background factor in assessing the nature of the relationship. As indicated by Park J in Usetech, provision of a personal service for payment does not automatically lead to the conclusion that the relationship is a contract of employment. Mrs Cumming emphasised that HMRC were not arguing that there was mutuality where someone was merely undertaking work in return for payment. To amount to mutuality, each party had to bind itself to something, and a relationship where a party could choose whether to commit itself could not be a contract of employment. I accept that on this question, HMRC's position is entirely consistent with that taken by the Appellants.

Mrs Cumming argued that many of the cases related to the question whether there was a single contract covering a number of engagements, and that on the basis of Prater, it was possible for mutuality to exist in respect of the separate engagements, even if mutuality could not be said to have continued throughout the existence of the relationship. I accept the principle that mutuality can be present in relation to a single engagement, but as Mr Smith argued, it is necessary to consider whether in fact mutuality exists within the single engagements.

The first question is whether there was mutuality of obligation throughout the period covered by these appeals. I consider the circumstances in this case to be unusual, if not unique. Mrs Derrick, on behalf of PPH, has been prepared to be unusually tolerant of an arrangement which is casual in nature. Much of this results from Mr May's personal problems associated with his alcoholism. Similarly Mr May has been prepared to accept an arrangement under which, although he has had the hope of work being provided by PPH, there has been no guarantee that work would be available on any particular occasion. I accept the evidence of Mrs Derrick and Mr May that the terms of the relationship between Mr May and PPH were such, in these very unusual circumstances, that Mr May was not under an obligation to carry out work for PPH but could choose to do so, and that correspondingly PPH was not under an obligation to offer work to Mr May but could choose to do so. Although the facts are very different, there are some parallels with Barnett v Brabyn, where Lightman J said (at p 145):

"I think that these factors might in an ordinary case carry some weight indicative of his status as an employee. But the weight is very much reduced as regards (1) and (2) by the fact that Mr Barnett insisted on the contractual right to work as much or as little as he liked."

Thus there was no mutuality of obligation extending over the whole period. This leads on to the question whether there was mutuality in respect of separate engagements, namely when Mr May turned up at the hotel and performed work for PPH. It is clear that if Mr May performed work for PPH, he expected to be paid for it. Similarly, PPH expected that any work that Mr May did for it was to be to an appropriate standard. Although, according to Mrs Derrick's evidence, Mr May generally carried out work to a suitable standard, there were some occasions when the work was not carried out satisfactorily, and she asked Mr May to put it right, in nearly every case without payment for the extra work involved.

The extent of obligations between Mr May and PPH in respect of each day that he actually worked did not differ from the extent of the obligations between them over the whole period. I accept that in Prater, Mrs Prater was considered to be under an obligation, as indicated by Mummery LJ at [11]:

"Although Mrs Prater was not obliged to accept pupils offered by the Council, once she had agreed to take on the work she was obliged to fulfil her commitment to that particular pupil and the Council was obliged to continue to provide that work until the particular engagement ceased."

In the present case, there was no greater obligation in respect of each separate day for which Mr May actually worked than there was over the whole period of the working relationship. I therefore find that there was no mutuality of obligation in respect of any shorter period within the time covered by these appeals.

In Montgomery at [28] Buckley J considered certain comments of Waite LJ in McMeechan taken into account by the Tribunal in Montgomery:

"It seems that they understood Waite LJ's judgment (perhaps correctly) as indicating that the task in hand is to weigh up all the factors and reach a conclusion without reminding themselves that McKenna J's first two criteria must be met as an irreducible minimum. Certainly the passages cited from McMeechan [1997] IRLR 353 could be so read. However, it could also be that Waite LJ simply assumed the principle and moved straight to the next stage of weighing all the factors. It follows from what I have said that if he did intend to reduce the 'criterion of mutual obligation' and by inference 'control' as well to no more than matters to be weighed up with all the other factors, with great respect I disagree. More to the point, I consider such an approach to be contrary to the Ready Mixed Concrete case itself (which, of course, would not have bound the Court of Appeal) but also to Nethermere [1984] IRLR 240 and Carmichael [2000] IRLR 43 in particular."

As mutuality of obligation is an essential element of the "irreducible minimum", it follows that the relationship between PPH and Mr May cannot amount to a contract of service, and that accordingly the appeals against the National Insurance Notice of Decision and the regulation 80 Determinations succeed. However, in case my decision in relation to mutuality of obligation is held not to be correct, I consider the other issues raised in these appeals.

The second element of MacKenna J's first condition in Ready Mixed Concrete is "personal service", or the worker's own work and skill. Although Mr May did assist in arranging for Paul Kain to carry out work at the hotel, the arrangement made was that Paul Kain was engaged directly by PPH. I do not consider that this amounts to arranging for a substitute. I accept Mrs Cumming's argument that in the absence of a written contract, it is difficult to establish that a right of substitution exists. I find that the person whom Mrs Derrick engaged to carry out the work was Mr May, rather than leaving him to choose whether to do the work himself or to send some other person in his place to carry it out.

The second condition is subjection of the worker to a sufficient degree of control by the other party to make the latter the worker's master. In Ready Mixed Concrete [1968] 2 QB at p 515 MacKenna J said:

"Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted."

It is clear, as Mrs Cumming argued, that what matters is the right of control, and not whether it is actually exercised. Further, as Cooke J indicated in Market Investigations, [1968] 2 QB at p 183:

". . . when one is dealing with a professional man, or a man of some particular skill and experience, there can be no question of an employer telling him how to do work; therefore the absence of control and direction in that sense can be of little, if any, use as a test."