HMRC Crash Lands!

Sherburn Aero Club v HMRC SC/3133/2008 Special Commissioner: John Clark

The case was taken before the Special Commissioners in February 2009 by David Harmer and Sarah Gordon (nee Thomson) of Accountax Consulting. 

The enquiry was worked by Daniel Cobelli of Accountax who believes this case should never have been taken before the Special Commissioners with the obvious control issues the case posed. Nonetheless, HMRC persisted and put our advocates through a painstaking nine hours worth of Submissions! That’s an Accountax record for a status enquiry and our hearts go out to the Accountax team for their perseverance! 

The Tribunal was obviously not impressed with HMRC’s ‘a history of case law’ approach, taking the Special Commissioner through each and every judgment since 1958!  In a stark contrast Sarah Gordon (nee Thomson) tidily summed up the Appellant’s case convincingly within two hours.

Background

Following an Employer Compliance review HMRC assessed all flying instructors engaged by Sherburn Aero Club (SAC) as employees.  Formal Determinations were raised and subsequently appealed by SAC. 

During the period in question (September 2005 to April 2007) there was a written contract; however not all of the flying instructors had signed the written contract.  Further, some of the written contracts had been mislaid over time and some of the flying instructors worked under arrangements which were entirely verbal and implied.  During 2008 (ie after the period covered by the appeals) the instructors were provided with written contracts.  In half of those cases the instructor and SAC signed an “Addendum” indicating the parties’ view that the new contract was a true reflection of the way the relationship had always existed. The flying instructors completed annual tax returns on the basis of being self-employed and those returns were accepted by HMRC for many years. 

Terms of the engagement

Flying instructors might approach SAC to see whether they could be added to the list of approved instructors, or in some cases SAC might approach them to see whether they would like to become an approved instructor.  In order to be added to the list an instructor had to be verified by the Chief Flying Instructor (CFI), who was an employee of SAC,  to check that the individual was suitably qualified to instruct flying lessons.  If the CFI deemed an individual suitable then the individual’s details would be passed to the board for approval, which in most cases would be accepted on the CFI’s advice.

An individual wishing to have a flying lesson had to be a member of SAC.  Instructors provided instruction in aircraft owned by SAC.  Students would contact SAC’s “Flight Desk” to request a lesson.  The Flight Desk staff would arrange for the hire of an aircraft and also for the booking of a “slot” with an approved instructor.

Instructors notified SAC in advance of the dates and times which they would be willing and available to provide instruction; however this did not necessarily mean an instructor would be asked to work on these days.  The instructors would check with the Flight Desk to see whether there was any work.  The system was flexible.

Having previously given notice of availability, an instructor could change his mind.  This could be notified to the Flight Desk in advance, or on the day when the instructor had been expected to give a lesson.  Instructors might cancel due to sickness, bad weather or because they considered there was insufficient work to make it worth their while to travel to SAC’s airfield.  SAC imposed no sanction on instructors for cancelling, even if this was at short notice.  The Flight Desk manager did however acknowledge that if an instructor frequently cancelled and proved to be completely unreliable, SAC would stop using their services.

If a student cancelled a lesson with less than 24 hours’ notice, the student would still be required to pay a “no show fee” of £22.  From this sum £17 would be provided to the instructor.  If SAC cancelled a lesson e.g. for adverse weather conditions, then the instructor would not be paid.  If an instructor attended the airfield in accordance with a booking and flying did not take place on that day, SAC would pay the instructor an “attendance allowance” of £7.50 as a good will gesture.

Instructors were paid on the basis of a standardised hourly rate.  The rate payable would depend on the type of instruction given, for example such qualifications as “Night Rating” or “Instrument Meteorological Conditions” attracted a higher rate.  The hours were calculated using the aircrafts “Hobbs Meter” which recorded the time during which the aircraft was ready to fly or was flying.  Ground based training was again on a standardised basis, except where it was included as a normal part of a flying lesson.

The instructors were free to work elsewhere, but were not able to advertise such “external” services at SAC’s premises.

During the period under appeal one of the flying instructors had been unable to attend a flying lesson and had arranged to send another club approved flying instructor in their place.  The flying instructors made the arrangements themselves; however SAC paid the replacement instructor.

Instructors had to follow the syllabus laid down by the Civil Aviation Authority (CAA).  It was desirable to follow the elements of the course in numerical order, but the instructor could decide the precise order for a student’s particular circumstances.  Discussions between the instructors and SAC’s CFI took place in order to evolve best practice in giving instructions to students, as well as to take account of safety considerations.  Where there were differences of view, the ultimate decision might have to be left to the CFI.  The instructors did not consider that SAC could tell them how to teach the students. 

The instructors were subject to the flying orders set out in the Flying Order Book; however these applied to anyone else using the airfield.  The order book included such instructions as “No flights shall take place at Sherburn airfield without the permission of the Chief Flying Officer or his nominated deputy”.  In practice, instructors authorised their own flights.

On the Day

Accountax called the following witnesses who gave evidence for the Appellant: the company Chairman, a director, the CFI, the Flight Desk Manager and two self employed flying instructors.  All witnesses gave the Tribunal a useful insight into the day to day workings of the Aero Club.

HMRC called three witnesses to give evidence for the Respondent, one of which was an ex flying instructor who had previously issued Employment Tribunal proceedings against SAC.  He was apparently the only instructor of all interviewed by HMRC who was available(!) 

It’s common practice for HMRC to call the Compliance Officer and Status Inspector who dealt with the enquiry to give evidence and in true Revenue fashion, both were called as witnesses.  However, such witnesses usually offer little, if any, insight into the working arrangements of the company and prove to be pointless witnesses.  In this case the Status Inspector appeared in the box for two minutes to confirm his name and with neither party having any questions for the witness, he was relieved!  Clearly an excellent use of taxpayer’s money!

HMRC’s second witness, the Compliance Officer, only damaged HMRC’s case.  The Officer informed the Tribunal that HMRC’s notes of meeting are typed up at HMRC’s offices immediately after conducting an interview and are then sent to the taxpayer within 5 working days, in line with HMRC policy.  However, Accountax pointed out to the Officer that HMRC’s notes of meeting had not been typed up until some eleven days after the meeting! Despite this, the officer maintained that the notes of meeting were an accurate reflection of what was said, even after admitting key pieces of information had been left out!

As previously mentioned HMRC’s submissions were a painstaking nine hours long.  Instead of bringing the Tribunal’s attention to key parts of case law decisions, HMRC’s representative spent a considerable amount of time reading out case law authorities almost from start to finish. John Clark is an experienced Special Commissioner who certainly did not need a lecture on case law!

Further, HMRC’s representative tried to dismiss nearly all of the Appellant’s case law authorities on the basis that the judgments could be distinguished on their own facts.  Accountax kindly pointed out that every case has its own set of facts that will be unique in one way or another; it’s the universal case law principles that we take from judgments which are important.

Decision

The Special Commissioner disregarded the 2008 contracts because they were outside of the period under appeal.  The Special Commissioner also dismissed the “addendum” and stated “A declaration by the parties as to their beliefs and intentions is not sufficient evidence to establish past facts”. 

This serves as a healthy warning that such retrospective statements are unlikely to influence the Tribunal’s decision.

Mutuality of obligations

The Special Commissioner concluded that in employment status cases, an ongoing relationship is not required.  In such cases the question is confined to what the relationship is when the worker is actually working for the engager. 

Unsurprisingly the Special Commissioner followed his own judgment in the recent case of  J L Windows (click for link). The “mutuality” condition was met in respect of the individual engagements actually undertaken by the flying instructors, and the choice on SAC’s part whether to offer them further engagements was not relevant in determining whether the condition was met in relation to specific engagements.

Personal Service (substitution)

SAC had to ensure that any person providing instruction to its members had the appropriate level of qualifications to meet the requirements imposed by the CAA.  Given the requirement to ensure appropriate qualifications, it would have been necessary to specify in a written contract the obligation on the contracting instructor to ensure that any substitute had those appropriate qualifications.  The Special Commissioner found it improbable that any oral contract governing such a relationship would be found to include such a provision.  In practice there had been very few cases in which an instructor had arranged for another instructor to be sent in his or her place, and where this had happened SAC had made a direct payment to the “substitute” instructor.  The latter needed to be approved by SAC before being asked to provide instruction.  The substitution therefore really amounted to selection of another approved instructor from the “pool” available to SAC.  The Special Commissioner did not view this as a real form of substitution.

 Control

The Special Commissioner said that control needs to be sub-divided as indicated by McKenna J in the Ready Mixed Concrete case.

 ‘What’

It was heard that SAC may request the flying instructors to change a lesson booking, for example to provide specialist training such as acrobatics.  Nonetheless, the instructors may decide that the change in the bookings puts him or her at a disadvantage so that it is not worth while attending, with the result that the instructor withdraws from the booking.  Thus SAC was not in a position to dictate to the instructor what work needed to be done.

‘Where’

The Special commissioner decided that there was no choice as to where the lesson should start, as this could only be SAC’s airfield.  Nonetheless, the flying instructors could decide the route to be taken by the student (within the tolerances of SAC’s rules and the terms of the Flying Order Book).  However, the restrictions did not arise from the terms of the relationship between SAC and the flying instructors; they applied equally to any pilot flying from the club.  Further, the flying instructors were able to decide whether there should be a discretionary ground briefing rather than a flight.  The Special Commissioner decided that SAC was not able to control the decision as to ‘where’ the services were carried out. 

‘When’

The casual nature of the arrangements meant the engagements had to be viewed as a series of short-term engagements.  The decision as to lesson allocation thus became a decision as to whether a contract would be entered into in respect of a lesson at a particular time, rather than a decision by SAC as to the time when the flying instructor is to carry out work under the terms of an agreed contract.  The Special Commissioner decided this did not amount to control as to when the services would be carried out.  The flying instructors had considerable flexibility as to whether or not an engagement at a particular time was entered into.  The Special Commissioner said this position was not affected by the relatively long-term relationship some of the instructors had with SAC. 

‘How’

The syllabus for all flying courses was dictated by the CAA; however SAC did not get involved in how the flying instructors taught the syllabus to the students.  Best practice was agreed among the instructors, and in cases where the instructors were not able to resolve matters, advice was sought from the CFI.  The Special Commissioner did not view this as control as to how the instructors carried out their task and stated: “I do not view the responses of the CFI in such circumstances as amounting to control of the way in which the flying instructors carry out their task.  It is simply a way of resolving a disagreement as to best practice.”

HMRC argued that the flying instructors were controlled as to ‘how’ by SAC’s rules and Flying Order Book.  The Special Commissioner did not take this view and stated:  “Rules of general application to everyone, in whatever capacity they were present on SAC’s premises, cannot be seen as control of the nature being considered by Mckenna J.  In order to be taken into account in establishing the nature of the particular relationship, such control must be a specific feature of that relationship.”

The results of the Special Commissioners’ findings were that the various elements of the “control test” were not fulfilled in this case.

In Business Factors

• Flying instructors were free to offer their services elsewhere.
• The instructors ran the risk of non-payment by SAC.
• SAC’s insurance policy was limited in respect of personal injury; therefore the instructors carried the residual risk for any loss or injury falling outside SAC’s policy.  Although cover reliance on SAC’s insurance was a factor tendering away from independent contractor.
• The flying instructors incurred considerable costs maintaining their qualifications, but this was no different to the position of an employed instructor.
• The only way for the instructors to increase profit was to make themselves available for the maximum amount of flying slots, but this was subject to the risk that some lessons might not take place.

The Special Commissioner concluded that the on the balance the flying instructors were in business on their own account, although in a relatively modest way.  They did not need a sophisticated business structure.

Intention of the Parties

The position of the employment status of the flying instructors was open to a degree of doubt; the parties’ declared intention was therefore a relevant factor, as mentioned by Lord Denning MR in the case of Massey.  Together with all the other terms and circumstances, the intention of the parties supported the Special Commissioner’s overall conclusion that the flying instructors were self-employed and not engaged under contracts of service.

The appeal was allowed.

This case is a clear demonstration of how preparation is key and how cases hinge on salient information.  Practitioners should always ensure they stick to the fundamentals of their case and highlight the relevant legal principles.

Accountax Consulting is also pleased to confirm that we have already had a number of cases dropped off the back of the Sherburn decision, so practitioners should read the judgment carefully.