Self Employed? HMRC Prosecution? Are You Sure?
This e-bulletin is not going to be an in-depth review of all the case law regarding self employed, employed or worker status. It is not going to examine the Gig economy, it isn’t going to talk about plumbers, delivery riders or non-taxi taxis. All of these topics will be covered at our Employment and Professional Disciplinary Team Seminar on Friday, 19 May when Erinna Foley-Fisher will be speaking extensively about those issues.
This e-bulletin examines the interrelationship between employment status in the Employment Tribunal and prosecutions on behalf of HMRC in the criminal courts. If, on one hand, an individual asserts themselves to be employed for the purposes of an Employment Tribunal, but is later prosecuted for failing to pay the proper tax having been prosecuted as self employed, it is easy to see where fracture lines may be created and previous inconsistent statements used against the defendant in criminal proceedings.
The writer was recently instructed to give expert evidence in criminal proceedings as to employment status for the purposes of assisting the jury in understanding the differences and in deciding whether the defendants had been dishonest in claiming one status or another. Therefore as employment practitioners, when advising our clients, it is increasingly likely that we will also have to explain the effect of pursuing one status or another, if later proceedings contradict or scrutinise these assertions.
What’s the Issue?
The criminal case of R v Anil Kumar  EWCA Crim 1979 is a good example of where employment status, or purported employment status, can play a key part in a criminal trial.
Mr Kumar was prosecuted for cheating the revenue. In essence it was a tax dodge using occupational pensions schemes, based on fictitious employment paperwork (letters of engagement) for their clients who were to be the beneficiaries of their own occupational pension schemes (see para 23 of the judgment).
In that case, the defendant was convicted. He appealed. On appeal, there were lots of technical arguments about the quality of the summing up by the judge. However, ultimately, the appeal was refused based on this paperwork; the defendant signed it, knew it to be false and therefore couldn’t complain. As an illustration, the letter began as follows:
“Further to our various discussions during the past months, we are now in a position to welcome you to The Brokerage Company Limited and to confirm your appointment as Hong Kong Procurement Manager… Initially your appointment is for a three month probationary period…”
Like all fraud cases, the prosecution must prove that the defendant was acting dishonestly, Mr Kumar’s signature on the false letters of engagement was the bedrock in this case.
Looking at things from the opposite side, that of an Employment Tribunal, the case of Launahurst v Larner  UKEAT/0188/09/MAA is illustrative. In short, the person who performed work (to use a neutral phrase) was a window fitter. He had signed an agreement with the company purporting to declare his status to be a contractor, as is often the case there was an ‘entire agreement’ clause. The first instance judge found as facts the following pertinent (for our purposes) aspects:
“Tax was never deducted by PAYE, but at all times the Claimant was registered under the CIS Scheme (or its predecessors) so that the Respondent deducted tax at 20 per cent from the amounts paid. The Claimant made his own arrangements to pay any further tax due. At all times the Claimant made arrangements to pay his own National Insurance contributions. He prepared accounts for the Revenue in which it would have been open to him to make claims for any tools or anything similar that he had had to purchase, though the Tribunal made no finding as to whether in fact he ever did so.”
So both parties, when it came to tax, were treating the claimant as a contractor.
In relation to the signed agreement the Employment Tribunal Judge found that it was drafted and signed:
“as the result of attitude that was taken by the Revenue in relation to the tax and self employment status”.
As any employment practitioner would have guessed, the agreement sought to deal with the usual Ready Mix Concrete factors that are taken into account when assessing employment status, in this case, to reinforce a contractor rather than employee status.
In relation to the ‘entire agreement’ clause the judge found as follows:
“The authorities indicate that a term such as that, in a contract, may be disregarded if it is a sham, that is to say that it has been created for the purpose of deceiving, e.g. the Revenue as to the true nature of the contract or did not reflect the true intention of the parties: Redrow Homes (Yorkshire) Ltd v Buckborough & anor,  IRLR 34. It may be a sham if it does not reflect the reality of the situation as it was operated between the parties and in those circumstances, I think that particular clause in the contract is a sham on that basis. In my view it bears no reality to the way the parties conducted themselves throughout the working arrangement both before and after the signing of the Contract”.
It should be noted that despite the EAT upholding the Launahurst decision at first instance, on a later appeal to the Court of Appeal the judgment was overturned due to various procedural irregularities. That said, the passages regarding the sham clause in the EAT decision are still of real interest.
You Say Dishonest I Say Deceit – Conclusions
Deception is a key phrase here. There is very little, if any, difference between proving dishonesty and proving an intent or purpose to deceive. So here is a clear example where a deception is taking place, in response to the “attitude that was taken by the Revenue in relation to the tax and self employment status”. Let’s put that another way, the parties intended to deceive HMRC as to the true employment status.
In reality, there is very little separating Kumar from Launahurst, except I would suggest, value. In Kumar the deception was intended to net the fraudsters a good deal of money, whilst in Launahurst the benefits would have been smaller. I also wonder if there is a tacit acknowledgment by the HMRC that the practice in Launahurst is widespread, that some taxes are paid and therefore it is better not to stir the pot.
It is easy to imagine a case where there has been a falling out between parties, maybe husband and wife, father and son, old friends, causing the employment relationship to be challenged. So be it. But in advising our clients we should be conscious, that whatever is said in Tribunal might, just might, be looked at a little closer by HMRC.