Tribunal Gives [some] Guidance on the Supervision, Direction or Control (SDC) Test…

A recent tribunal case, Tyler Security Limited (TSL) v HMRC, examined the supervision, direction or control (SDC) rules under Sections 44–47 ITEPA. As one of the first judgments on this issue, it offers insight into how tribunals interpret SDC—an area of growing importance with forthcoming umbrella company tax reforms that may increase self-employment. Although the decision has limited precedent value, it highlights that SDC assessments are highly fact-dependent. TSL’s appeal failed, with the tribunal finding sufficient evidence for Sec.44 to apply. What value the judgment does have is in the overarching themes and practical takeaways that businesses can use to assess and analyse their own Sec.44 and SDC compliance. We’ve outlined these below:

Key Legal & Practical Themes

Calling something a ‘service’ doesn’t mean Sec.44 can’t apply…

One of the arguments put forward by TSL was that they were providing dog detection services rather than acting as an ‘agency’ supplying individual workers; therefore, the services were not within the scope of Sec.44. The tribunal disagreed with this proposition on the basis that the service provided by TSL was that of individuals.  In doing so, the tribunal referenced the contracts agreed between TSL and clients where the services were described as the provision of operatives.  Furthermore, TSL were paid on the basis of the operatives provided and the hours those operatives worked.

Takeaway:

The takeaway from this argument and how the tribunal addressed it, is that simply labelling a supply as a ‘service’ will not on its own bring an arrangement outside of Sec.44. Tribunals will not simply accept this labelling, if the facts and documents suggest otherwise.

Tribunals will cast the net wide in search of evidence…

For some intermediaries, when approaching the question of SDC, the focus will be on the contract agreed with the worker and the contract agreed with the client.  These are undoubtedly important documents and a good starting point.  However, as we have consistently advised, any focus on those documents alone will not be sufficient to gain clarity on the practical and actual SDC position.  The judgment pertaining to TSL bore this out.

The tribunal considered the contracts but went well beyond them eliciting evidence from invoices, working briefing notes, health and safety documents, protocols, guides and booking schedules, as well as evidence taken verbally at the hearing.  As it turned out, in this case, the primary documents (including the contracts) contained rights of SDC sufficient to bring the dog-handlers within Sec.44 without further investigation.  The fact that the tribunal went well beyond the primary documents, despite the evidence contained in them, is a key lesson for our readers. 

Takeaway:

When reviewing an arrangement for SDC purposes, clients should review and test as many relevant documents as possible throughout the contractual chain.  Reliance on reviewing just the contracts is unlikely to be sufficient and a tribunal, as in the TSL case, will cast their net far wider than this.

Practice makes perfect…

As stated above, the key documents in this case contained sufficient rights of SDC for the tribunal to find that Sec.44 was in play.  However, it should be noted by our readers that the tribunal went well beyond the documents and into considerable detail as to how the dog-handlers provided services in practice.  This included looking at how the dog-handlers conducted their work, how they liaised in practice with TSL and the end-clients, how they were monitored, managed and supervised on a practical level and, what the service provision required on a functional basis.  All of these practical and real-life considerations were given significant focus by the tribunal in the TSL case.

Takeaway:

Any review of an engagement for SDC purposes should not, if that review is going to be as valuable and insightful as possible, be limited to the documents alone.  The practical and functional arrangements must also be considered.

Remember where the burden of proof lies…

An interesting element of the TSL judgment relates to how little substantive debate there was on the issue of what constitutes ‘the manner’ in which the services are provided.  In TSL the tribunal appears, for the most part, to take the evidence, whether that be documents, testimony or practical examples, and consider them all through one lens, rather than determining which elements of SDC actually related to ‘the manner’ and which did not.  This unfortunately means there is little assistance in this judgment with regards to what constitutes the ‘manner’ in which the services are provided.

Why the tribunal did not go into this in any significant detail is unclear and it is difficult to speculate whether there was simply overwhelming evidence pertaining to SDC as to the manner that a distinction wasn’t necessary or, that it was not argued by TSL or, for some other reason.  This does though, lead us to the next key takeaway for our readers.

Takeaway:

The burden of proof is on the taxpayer to ‘show’ there is no SDC as to the manner.  Therefore, when reviewing arrangements for SDC purposes, parties should always be considering how they will show a tribunal that there is no SDC.  Furthermore, when arguing a case at tribunal or during a HMRC enquiry, as the taxpayer, if you want to argue a particular point, for example, that any SDC is not to the ‘manner’, then make sure you argue it (particularly as HMRC will start with the presumption that there is SDC). The burden is on the taxpayer to ‘show’ that the legislative conditions for SDC are not satisfied.

A confusing relationship with employment status…

Interestingly, and somewhat confusingly, in discussing what constitutes SDC, the tribunal took an approach similar to traditional employment status cases and in particular the case of PGMOL. The tribunal found that SDC or the right of, did not have to exist over all of the services for Sec.44 to apply.   While this, in and of itself, is not controversial, the tribunal then went on to suggest that SDC over ancillary or incidental matters may well be sufficient for Sec.44 to apply, similar to the ‘framework of control’ alluded to in PGMOL.

It should be noted that in this particular case, certainly on the facts found by the tribunal, the documents and evidence as to the services appeared to point to sufficient SDC well beyond a framework or incidental matters.  It will be interesting to see if this first instance decision (with limited binding powers) is appealed, or whether we’ll have to wait for another case to get the opinions and guidance of the upper courts.

Takeaway:

If parties are considering or reviewing arrangements with the SDC test in mind, then the facts and circumstances of that particular arrangement are the absolute key.  Themes can be taken from judgments but ultimately, as alluded to by the tribunal, the words in the legislation and how they apply to a particular set of facts is the key consideration.

Level of skills or experience not enough on its own…

For some, a decision as to whether Sec.44 applies or not, is made based on the skills, experience, or pay rate of a particular individual.  We’ve often audited arrangements whereby workers that are considered skilled and on a sufficiently high pay rate are judged to not be under SDC and therefore not within Sec.44, and therefore engaged on a self-employed basis, whereas those lower skilled workers on a lower pay rate are treated as being within Sec.44.

This type of blanket judgment has always been, in our opinion, unlikely to be a sufficiently detailed approach to provide any certainty with regards to the applicability of Sec.44. This judgment makes it clear that simply because a particular worker is highly skilled and experienced it does not mean that they fall outside of Sec.44 merely because of said skills and experience.

Takeaway:

Detail, detail, detail!  Making a judgment call on one factor alone, like for example, the skill level of a worker, particularly if it is done on a blanket basis, is risky and lacks the type of detailed analysis required to properly address Sec.44.

Focus on the legislation at hand…

TSL made a number of arguments as to why they were not an ‘agency’ for the purposes of Sec.44 in a bid to argue that the legislation, as a whole, did not apply.  A similar tactic, albeit in a different jurisdiction was adopted by Uber when faced with worker status claims.  TSL sought to draw on VAT legislation and employment rights legislation in differing arguments to argue why they were not an agency and therefore Sec.44 did not apply.

While drawing on other unrelated legislative provisions can assist an argument, particularly when the legislation at issue is largely untested in the courts, the tribunal was clear time and again in reverting back to the wording of Sec.44 (and the associated sections) and was not swayed by the similar terminology or concepts that may exist in other legislative provisions.

Takeaway:

Drawing on other legislative provisions may assist but the core focus of any argument or assessment of Sec.44 must be on the provisions of Sec.44 itself. 

Don’t forget how this all started…

We’re often reminding our readers of the increasingly coordinated approach that government departments and regulatory bodies are taking.  This case is an example of two regulatory bodies working together (HMRC and the SIA).  Ultimately, this matter began with TSL seeking to remain within the SIA’s accredited contractor scheme.  A condition of this scheme was that all workers had to be engaged as employees for tax purposes.  When TSL disputed this and refused to engage the employees in the form required by HMRC and the SIA, HMRC commenced an enquiry and the rest, as they say, is history.

Takeaway:

Readers should understand and appreciate the growing relationship between regulatory bodies and the potential ramifications of these relationships and that they will continue to grow when the Fair Work Agency hits its stride.

Disclaimer:  Chartergate Legal Services Ltd has drafted this update to provide you with a general overview of the relevant law and developments at the date of sending only.  This email is provided as a general overview and should be taken as such.  It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.