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December 19, 2016

Ashton v HMRC - Employee or Self-Employed Partner?

In the recent case of Ashton v HMRC, the First Tier Tribunal held that a taxpayer was an employee and not a self-employed partner for tax purposes, despite filing partnership returns over several years.

As a result, income tax and National Insurance contributions (NICs) for the tax years in question were payable at the rates in line with employment.

The Facts

  • Karate World was a martial arts instruction business started by Mr Thompson as a sole trader. The business eventually grew to have a number of employees including Mr Ashton (the taxpayer).
  • Eager to grow the business further, in October 2003 Mr Thompson set up a partnership with a number of the employees as partners.
  • From 2003, the taxpayer was listed as a partner on the partnership returns.
  • Between 2003 and 2011, the taxpayer submitted self-assessment returns as a partner, paying class 2 NICs.
  • Discrepancies between the information filed on the partnership returns and the information included on the taxpayer's self assessment tax returns led to an enquiry, and assessments were raised by HMRC into the taxpayer’s returns for the years 2008/09 to 2010/11 for additional tax of over £16,000.
  • Following the issue of assessments, the taxpayer made an appeal on the basis that he was not a partner in Karate World, but was instead an employee.

The Case

The taxpayer submitted that they could not be regarded as a partner as they took no financial risk in the partnership. The taxpayer had never seen the partnership accounts nor entered into a written partnership agreement.

The taxpayer received basic pay plus a bonus based on the partnership’s turnover (as opposed to profits) and there was no expectation that any losses be shared amongst the partners. The taxpayer’s relationship with the business had changed very little since the creation of the partnership and their working practices were still very much under the control of Mr Thompson.

HMRC contended that the taxpayer was a self-employed partner throughout the period, had claimed expenses in line with such an arrangement and had met all the necessary compliance obligations of a self-employed individual.

The Decision

The Tribunal decided that the taxpayer was, in fact, an employee and not a self-employed partner within the firm.

There is no single determining factor that specifically distinguishes employment from self-employment and the Tribunal considered the overall picture against relevant case law.

The following factors were influential to the Tribunal’s decision:

  1. There was substantial control over when and how the taxpayer worked;
  2. The payment of holidays and sickness is inconsistent with self-employment; and
  3. There was no significant change in relationship from the taxpayer moving from employment (pre 2003) to self-employed partner (post 2003).

Further Reading

Salaried partners of Limited Liability Partnerships may now be treated as employees from 6 April 2014 (subject to certain rules).

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