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I am grateful to Anne Redston of Ernst & Young for bringing this case to my attention. The judgement was issued in January 2003 and while the case relates to the VAT position of self employed hairdressers working on a ‘rent a chair basis’ in a salon, it throws up some interesting issues for employment status is general.
Background
The case revolved around whether 45 self employed hairdressers who operated via a chain of hair salons run by Kieran Mullin Ltd were in fact supplying services to their client or to the chain of salons? If, as the chain contended, it was the former then the chain was not responsible for accounting for VAT on the services supplied to the client. If it was the latter then the chain was, in effect, supplying the service to the client and should account for VAT on those sales.
An earlier tribunal had concluded that two of the 45 hairdressers were selling their services direct to their customers, not the salon. This arrangement is referred to as a “service to the customer structure”. However, for the remaining 43 of the 45 hairdressers, the tribunal concluded that they were supplying their services to the salons, who were then supplying the service to the customer. This is referred to as a ”services to the salon structure”. Hence in these cases Customs and Excise were justified in demanding that the chain of salons account for output VAT on the sales.
The chain was appealing the decision.
Employed or self employed?
Each of the hairdressers worked under a ‘rent a chair’ agreement. The original tribunal seems to have concluded that, for 43 out of 45 of the hairdressers, their relationship was not really one of self employment. Certainly looking at the agreement it appears to have many features that the Inland Revenue would argue were employment-like. The actual agreement read as follows:
“HAIRDRESSING RENT A CHAIR CONTRACT
An agreement made on [date] between the Salon Owner - Mr Thomas Kieran Mullin of [address] and the
Hairdresser [name and address]
Whereby the Salon Owner agrees to provide a chair to rent and the Hairdresser agrees to rent the chair on the following terms and conditions.
1 . The Hairdresser declares that he/she is a self-employed hairdresser and acknowledges that he/she is responsible for his/her own income tax liability and National Insurance contributions and has submitted the appropriate arrangements to those departments.
2. The Hairdresser agrees to abide by the appropriate rules as contained in the Company Instruction Booklet.
3. The chair rental may be varied according to the situation of salon, experience of hairdresser, seasonal variations of trade, etc.
4. [A restrictive covenant restraining the hairdresser for one year after termination of the contract from operating as a hairdresser within half a mile of the salon.]
5. During the periods 1 April to 31 October and 1 November to 31 March a rent free period of 2 weeks and 1 week respectively will be granted for holidays.
6. The Hairdresser will, except on his/her agreed weekly rest day, be in attendance at the salon where he/she is working during normal opening hours appropriate to that salon.
7. One week’s notice by either party is required to terminate this contract.
[Signatures]”
The degree of control exercised by the salon is a strong pointer towards a contract of service – for example following the company rule handbook, having to agree holidays in advance, attending the salon at set hours etc. Customs and Excise summarized the situation as follows in their original decision:
“In April 1998 I had occasion to examine your contracts and procedures with regard to Chair Rentals in your salons. From the information supplied at that visit I assessed for standard rated tax on the rental income received from the scheme. The Commissioners have subsequently received information which clearly indicates that the self-employed stylists do not exercise control over their own actions and have ultimate authority over all aspects of their business. The degree of control exercised over the self-employed stylists is coterminous with that of subcontractors making their supply to the salons and as such, the onward supply to the public is standard rated. The information which led to the reconsideration is detailed as follows:
· Holidays have to be applied for in writing and are often not approved.
· Self-employed stylists are told to make up the lost day during weeks which include Bank Holidays.
· Self-employed stylists are not able to appoint a locum should they require time away from work.
· Self-employed stylists taking more that one week sick leave have to produce a sick note.
There appears to be an error in the letter (or in the case judgment’s reproduction of it) as the third sentence is contradictory unless there should have been the phrase ’do not’ in front of ’have ultimate authority’
Nevertheless if the facts are as stated it seems to me that, apart from the stated intention that the hairdressers be self-employed and the fact that they ‘rented’ the chair, this agreement seems to have strong employment overtones. Certainly I would like to see how a similar contract would stand up under an IR35 challenge!
So it is not totally surprising that the original tribunal reached their decision largely on their view that the 43 hairdressers were not really independent contractors. Their original decision apparently states:
“... KML‘s self-employed stylists cannot be given the freedom to operate as truly self-employed persons for, if they were, KML’s business simply could not operate. ... If the latter [the self-employed stylists at one of the salons] were allowed to come and go as they pleased - as self-employed stylists should be allowed to do - we fail to see how the salon could provide any sort of service acceptable to the public.” (Decision paragraph 67.) “... We are quite satisfied that KML exercises a degree of control over its self-employed stylists that is incompatible with their being independent contractors.” (Paragraph 69.) “It is quite plain, and we find, that the self-employed stylists have no possibility of operating as independent contractors within KML’s salons: they do not have complete freedom to establish their own price structures and times of opening (including closure for holidays); they are unable to compete openly for clients within the salons, and to accept or reject them at will; and they are unable to make their own insurance arrangements. (Paragraph 74.)”
“
However, the High Court had deep concerns about how the information to support the tribunal’s decision was obtained.
Gathering information
Once Customs & Excise had issued their decision and the company decided to appeal it Customs & Excise sent out questionnaires to each of the 45 self employed hairdressers and received back 15 responses. However the high court noted that the responses were not unanimous in their replies and were often very brief with no explanations as to why they had answered as they did. It appears not to be coincidence that the two hairdressers who were judged to be in a service to the customer structure and truly self employed contractors were the only two that the company had called upon to give evidence to the tribunal. It appears that the tribunal decided that these two were no under the same degree of control by the company – one because she was the only hairdresser working at the salon where she worked - and the other because he appeared to disregard the company’s rules and just did his own thing!
The High Court was not at all happy with the approach of the tribunal. It objected to the fact that those who answered the questionnaire were not advised as to the use to be made of their responses and the import of the issues the questionnaires were trying to explore. It also objected that, as a result of the tribunal’s decision, two of the hairdressers’ sales were free of VAT whil,e for the other 43, the company had to retain output VAT from the sales receipt – to their disadvantage. The judgement states:
“The point here is that a decision has been given which is financially harmful to 43 out of 45 self-employed stylists. The decision has been reached without hearing evidence from any of the 43, and I do not think that it can fairly be said that that is their fault, or KML’s fault, for not arranging the appeal so that they all gave evidence. “
The Appeal decision
The High Court decision was to allow the company’s appeal against the earlier tribunal’s decision regarding the 43 hairdressers who had been found to be working under ’a services to the salon structure. In reaching this view Mr Justice Park does not appear to have had any doubts about whether the rent a chair agreement was really a contract for services.
The judgment states:
” So the critical question is: what was the relationship between the self-employed stylists and KML? In my view the starting point, and sometimes the finishing point as well, in answering a question of that nature is to analyse the contractual terms which operate between the parties.”
On the contract he states:
”The critical provision of the contract is the one which provides that KML, is to provide a chair to rent and that the self-employed stylist is to rent the chair. That provision is supplemented by the conduct of the parties, whereby the stylists make payments to KML, by way of chair rentals and service charges, and KML, provides receipts to the stylists for the payments so made. In my judgment that contractual position is consistent with it being the stylists, not KML, who supply the hairdressing services to the customers”
Mr Justice Parks notes that you have to consider more than just the contract to make sure that the contract is consistent with the evidence. However he found no evidence that the contracts were not operated as drafted and he noted that the tribunal also concluded that”‘We find that self-employed stylists of KML operate their businesses in accordance with the terms of the Hairdressing Rent a Chair contracts.”
He concluded that the tribunal’s judgment was inconsistent with this finding.
Mr Justice Parks goes on to state:
”For example the Tribunal states in paragraph 64: “The fact that the Rent a Chair Contract specifically requires a self-employed stylist to be in attendance at her salon ‘during the normal opening hours appropriate to that salon’ is sufficient on its own for us to find that self-employed stylists supply their services to KML, and not to the public.” I cannot agree with the specific point there made.
The requirement for self-employed stylists to be in attendance during normal working hours seems to me to be neutral on whether, when a stylist is at a salon and treats a customer’s hair, it is KML, or the stylist who is supplying the hairdressing service to the customer. It might, I suppose, be said that the stylist supplies to the salon a service of being present so that the salon is fully staffed, but that does not mean that it must be KML which provides the hairdressing services to a customer.
But my more fundamental point is that neither in that paragraph nor anywhere else in the ‘Conclusions’ part of the decision is there any reference to the central provision of the contract, that KML, is renting a chair to the stylist and the stylist is renting the chair from KML.
ii) A closely related point is that the Tribunal nowhere explains how its conclusion that KML, not the self-employed stylists, supplies the hairdressing services to customers can be reconciled with the central provision of the contract and the finding that the self-employed stylists operate their businesses in accordance with the contract. As I have said, it appears to me that the conclusion cannot be so reconciled. At least the Tribunal needed to explain how it can be, but the decision contains no explanation.
iii) The Tribunal relies principally on the various elements in the contract and the instructions and rules (incorporated into the contract by paragraph 2) whereby KML, has extensive powers of control over aspects of the activities of the self-employed stylists. In my opinion those elements would be relevant to a different question, but are at most of marginal relevance to the actual question which the Tribunal had to decide. If it was established that the stylists provided their hairdressing services to KML and there was a dispute about whether they did that as employees or as independent contractors, the degree of control which KML, had over them and over their working hours would have been highly relevant.
In the context of that question the concluding sentence of paragraph 69 of the decision would be appropriate: ‘We are quite satisfied that KML exercises a degree of control over its self-employed stylists that is incompatible with their being independent contractors. ‘ But, as it appears to me, the question is not whether the stylists provide their hairdressing services to KML, as employees or as independent contractors. Rather it is whether they provide hairdressing services to KML, at all, or whether they provide those services to the customers. On that question my opinion is that there is little relevance attaching to questions such as whether or not the stylists are free to stay away from the salons in normal working hours”
Conclusions
So what are the conclusions we can draw from this case? The first one seems to be that the Inland Revenue must be careful that the evidence they use to determine a taxpayer’s tax status should be obtained from people who know and understand the use to be made of their responses. Hence if the Revenue asks a client for details of how a freelancer operated on a day to day basis it needs to be clear that the respondent understood the full import of the answers they gave.
It also suggests that the Revenue cannot investigate one freelancer working at a site on a standard contract and, from that investigation, conclude that all freelancers working at the site using the same standard contract are in the same position.
This decision also suggests that client control as an indicator of an employment relationship should not be regarded as a clear cut pointer towards employment status. It seems quite clear that in this case the salon exercised considerable control over the hairdressers but this by itself did not call into question whether they were supplying services to their customer or to the salon.
However, we also need to bear in mind the comment above of Mr Justice Parks that this case was based on assessing whether the hairdresser was supplying services to the customer or to the salon. This was not quite the same as asking whether they were really self employed or employed, even though many of the key issues appear to be the same. It seems strange in retrospect that Customs and Excise did not try and argue that they were really employees of the salon.
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Kevin Miller, MA FCA
© Shout99.com 2003
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