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HMRC internal manual

VAT Taxable Person Manual

Issues to consider: Employment status: Casework and tribunal examples which may aid your decision making

a. Cases clearly in favour of a contract for services

A bar manager was engaged by a club under a contract which stipulated, amongst other things, the hours at which he must open the bar and restaurant, how he should engage staff, how he should deal with breweries and suppliers, and dress standards. Thus his duties were stipulated in some detail, but there was little control over the exact manner in which they were performed. The control factor was thus in favour of a contract for services. The initial impression of the control factor was further reinforced by consideration of chance of profit and risk of loss. The bar manager was paid a standard sum, plus a bonus equal to 10% of the club’s annual net profit, but he had to provide security of £5000 to cover any deficiencies for which he was directly responsible. He also had to recruit and pay the appropriate staff and was responsible for their NI and PAYE contributions. There was therefore ample opportunity for the bar manager to profit and significant risk of loss - both of which indicated a contract for services.

The fact that the bar manager was employed solely by the club was more indicative of a contract of service; but the overall impression given in this case was clearly one of self-employment.

b. Borderline cases

A diocese engaged a registrar and confirmed the appointment in a letter, which set out duties and terms. By this letter, hours of work were fixed and holidays had to be agreed in advance. A secretary would provide cover while the registrar took holiday, but any more professional cover would have to be provided and paid for by the registrar herself. We considered that, on the issue of control, findings were inconclusive. However, the factors of chance of profit and risk of loss were clearly in favour of a contract of service. The registrar’s fees were clearly laid out and there was no possibility of making a profit over and above these sums: there was, for example, no performance-related bonus.

Similarly, the registrar was not required to provide any bond or security to cover poor performance. The overall impression in this case was narrowly one of employment and this ruled out the possibility of the registrar’s services being taxable as an office holder under Section 94(4) of the VAT Act 1994. (See also Office Holders in the VAT Business/Non-Business manual - VBNB41000).

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c. Cases clearly in favour of a contract of service

New Way School of Motoring (LON/78/317) was a driving school case in which the instructors were ruled to be employees of the driving school. In this case, each instructor signed a written contract, under which the driving school maintained a high degree of control. For example, instructors who did not meet targets in terms of hours worked had their contracts terminated; and all fees received from pupils were passed directly back to the school. Ownership of tools and the risk of loss also pointed to a contract of service - all the cars were owned and insured by the school and the instructors were paid a guaranteed minimum wage.

The fact that the fees received by the schools were subsequently divided up between the instructor and the school was seen by the tribunal as akin to a joint venture, and thus more consistent with a contract for services. However, the tribunal found that overall the facts were more consistent with the instructors being employees under contracts of service.

In John Wright Chalmers and Mary Wright Chalmers (LON/82/84), a tribunal again ruled that driving instructors were employed by the driving school. The school exercised a high degree of control over the instructors: it required them to charge agreed fees and to report weekly to the school to account for their cash takings. All cars were owned by the school, which also paid for their maintenance, upkeep, and insurance, and for all petrol and oil consumed during tuition. The range of expenses borne by the school thus meant that the instructors ran no risk of financial loss; and the instructors were allowed to retain only their agreed fee per lesson and so had little chance of profit. This case was also interesting in that the tribunal reached its decision despite agreements between the school and the instructors which classified the instructors as self-employed, and despite the instructors being chargeable to tax on trading income for direct tax purposes.