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The tax tribunals share a common problem with the employment tribunals: contracts of employment.
This is highlighted by the Uber case, an employment case in which the final and conclusive judgment of the Supreme Court was promulgated today.
This is an important judgment for employment law cases and will have significant repercussions in the tax tribunals, which may not be quite so apparent at first blush. The significance of the case is emphasised in that seven Justices sat in judgment, though Lord Kitchin fell ill before judgment was handed down. The remaining six Justices were unanimous in their reasons for dismissing Uber’s appeal.
The Employment Effect
In Uber, the claimants said that they were ‘workers’ and so entitled to certain statutory protections (in this case, a minimum wage, paid annual leave and protection from sanctions against ‘whistleblowing’).
The Supreme Court confirmed the view of Baroness Hale expressed in the Bates van Winkelhof case that in employment law there are three types of people; the employed, the self-employed and the ‘worker’, who is somewhere in between.
The ‘worker’ does not exist as a concept in tax law (though the term is widely used in the legislation) and would probably fall into the category of self-employed (rather than as employed, the only other available category in tax matters). Indeed, in Pimlico Plumbers, Lord Wilson confirmed (albeit as a non-binding aside) that the claimant (who was a ‘worker’ for employment purposes) correctly reported as self-employed for tax purposes.
In Uber, the Supreme Court confirmed that the claimants were ‘workers’ and for reasons that will be familiar to employment practitioners and tax practitioners alike:
As is so often the case in employment and tax cases alike, the Supreme Court had to grapple with the question of whether the written terms of the contracts represented the starting point in determining the rights enjoyed by the claimants.
As a matter of general contract law, if parties enter into a written contract, the courts will not usually go behind the terms of the contract, even if it does not appear to be fair to one or other of the parties. The doctrine is known as freedom of contract and the courts see this as a commercial matter.
In arriving at their judgment, Autoclenz was considered by the Supreme Court in the Uber case. The principle developed in Autoclenz was that the usual rules of contract law did not apply in employment-like cases because the worker’s bargaining power is very much weaker than that of the employer. The reality is, the worker has to accept the work on the terms offered or walk away.
That opens-up the spectre of abuse of course. In cases like Uber, workers say that they are really employees or statutory workers but denied their rights because the contract says that they are self-employed.
Looking at Autoclenz, the Supreme Court looked a lot closer at why the courts depart from the usual rules of contract law in employment-like cases. In all sorts of cases, there is a severe imbalance in bargaining power but the courts will not intervene. In fact it is rare that there is equal bargaining power in any meaningful sense.
The Supreme Court identified that in employment-like cases, Parliament had conferred certain statutory rights to individuals. Thus, to determine whether an individual qualified for those rights was a matter of statutory interpretation, rather than one of contractual interpretation. This was important to ensure that statutory rights were not unilaterally denied to workers by employers using their bargaining power to impose terms allowing them to avoid their legal responsibilities.
The effect of that rationale is to justify the court departing from the doctrine of freedom of contract. Thus, the court was able to take the purposive approach when reading the terms of the applicable legislation and construct the contractual relationship in question accordingly; in order to achieve the object of the legislation.
The Tax Effect
A potential reading of the Uber case is to advance that in tax cases as well, one party to a contract or the other (or both, in agreement) might seek to subvert the intended effect of tax legislation by forming their contractual relationship in one form rather than in another. Does this mean that the court is able to cast aside the doctrine of freedom of contract, to secure tax revenue?
A clear example is the building company engaging workers on a “self-employed” basis with a wink and a nudge. One might also think of IR35 and the personal service company.
In such a case, does the approach taken in Uber allow the tax tribunal to adopt a purposive approach to consider whether the terms of the contract should be the starting point of analysing the nature of the contractual relationship?
The keen eye of the tax practitioner is drawn to the Court’s analysis of the Secret Hotels2 case on which Uber had heavily relied. In that case, the taxpayer company reserved hotel rooms, paying for them in advance, and then ‘let’ out those spaces to individuals.
The taxpayer sought treatment as an agent or intermediary for the hotel (which was more favourable for the VAT consequences). HMRC contended that the taxpayer was really a supplier of services in its own right.
At 107, Lord Leggatt said this:
“Secret Hotels2 was not an employment case: it concerned the classification of a relationship for VAT purposes. In applying the VAT legislation, the proper approach… is informed by the policy that “taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens”, albeit that this is subject to an exception for “abusive transactions””. [emphasis added]
The importance of this paragraph should not be understated. It distinguishes the reason why the employment tribunals so readily ignore freedom of contract; it is to protect the statutory rights of individual workers.
Lord Denning MR, in one of his most important and well-known judgments (the Finney Lock Seeds case) considered freedom of contract and how and why the courts might ignore the doctrine. In so doing, he identified freedom of contract with the oppression of the weak. So, for example, the consumer could not be denied statutory consumer rights by the terms of a contract imposed on her by a big corporation.
Tax is not such an area where individuals are afforded statutory rights. HMRC can hardly be seen as a weak and oppressed person, deserving of the court’s intervention to protect her fragile rights.
In Uber, the Supreme Court set a clear benchmark that the parties are free to choose their economic structure. The tax consequences follow and the courts should not interfere with the terms agreed on, save in the case of “abusive transactions”.
It should follow from this that if worker and client / employer prefer self-employment because that is more attractive from a tax point of view, unless that relationship constitutes an “abusive transaction”, the tax tribunals should have no business in going behind what was agreed.
Lord Clarke’s approach in Autoclenz was set out at 62:
“… in the employment context, it is too narrow an approach to say that a court or tribunal may only disregard a written term as not part of the true agreement between the parties if the term is shown to be a “sham”, in the sense that the parties had a common intention that the term should not create the legal rights and obligations which it gives the appearance of creating…”
So, where the parties together decide that they will contract with one another in a form of their choosing, there is a strong case here for arguing that Uber says that the tax tribunal should not interfere unless there is a sham.
As an example, in the Christa Ackroyd case, the FTT categorically accepted that the TV presenter and the TV channel had expressly intended not to create an employment relationship. The FTT went on to look at the facts on the ground to determine that had they contracted directly with one another (without an intermediary), the relationship would have been one of employment.
Simply put, the implication of the Uber case is that the FTT adopted an approach to the contract that would have been perfect in the employment tribunal but was perfectly wrong in the tax tribunal.
Freedom of contract remains in UK law an important doctrine with limited exception. The Supreme Court in this judgment has firmly planted the flag of that doctrine in the tax landscape.
It is not often that the rights of the State will need the protection of the Courts.
If you have any queries about this article, or tax matters in general, then please do get in touch.