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Employment lawCase law

Demibourne v HM Revenue & Customs, Special Commissioner, 23 June 2006

by Eversheds HR Group 5 Sep 2006
by Eversheds HR Group 5 Sep 2006

Potential tax liability for employers of ‘self-employed’ workers
Demibourne v HM Revenue & Customs, Special Commissioner, 23 June 2006

Background

Demibourne employed Mr Bone for many years to be responsible for general maintenance. During Bone’s employment, Demibourne paid full tax and National Insurance (NI). When Bone turned 65 in 1993, he continued working for Demibourne, but was treated as self-employed, and paid tax and NI himself. In 2002, HM Revenue & Customs (HMRC) visited Demibourne. It took the view that Bone was an employee. Demibourne and HMRC then failed to agree the amount of tax due, and so HMRC demanded the full amount of tax and NI due from Demibourne, without any credit being given for the tax and NI Bone had already paid. Demibourne appealed against HMRC’s decision that Bone was to be treated as an employee between 1993 and 2002, and that it was liable for the income tax and NI payable within that period.

Appeal

The Special Commissioner decided that Bone was an employee between 1993 and 2002, as the terms of his engagement during that period were very similar to those of his employment up to that time; the only changes were to the terms of payment and to his holiday entitlement. HMRC had adopted the right approach in requesting the tax and NI due from Demibourne. The Special Commissioner said he had no power to order any credit to be given for the amounts already paid by Bone, although he did suggest that a negotiated settlement giving credit for the tax paid would be the most desirable outcome.

Comment

Where an individual has wrongly been paying tax as a self-employed person, the Inland Revenue can potentially recover the full amount of tax from the employer. The decision emphasises the need to ensure there is a clear contractual arrangement in place that reflects the self-employed nature of the work. If, as in this case, a worker has switched from employee to self-employed status, there should be clear differences in the contractual arrangements that reflect the change.

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