[2009] UKFTT 358 (TC)

TC00296

Appeal number:SC/3216/2008

Income tax – whether authorised transfer out of authorised pension schemes – whether sham employment – whether Directions under Reg 72A PAYE regulations properly made – penalty for negligent tax return

FIRST-TIER TRIBUNAL

TAX 

	BENJAMIN JAMES KENT	
Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	
Respondents

				TRIBUNAL: 	BARBARA MOSEDALE

Sitting in public in Manchester on 25 September 2009

Mr M Chong, Chartered Accountant, for the Appellant

Mr A Nawbatt, Counsel,  instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction
1.	On 29 August 2006 HMRC amended the Appellant’s tax return for the year ended 5 April 2002 to reflect an additional liability to tax of £18,568.15.  This followed an enquiry into the Appellant’s tax return for the year ended 5 April 2002 which led HMRC to conclude that there had been an unauthorised transfer of his funds out of two authorised pension schemes.  The Appellant appealed against this amendment on 19 November 2006. 
2.	On 26 July 2007 HMRC issued a direction to each of the two authorised pension schemes that due to the fact the error was made in good faith they would not be liable for the under-deducted tax on the unauthorised transfer of the Appellant’s funds.  The effect of the Directions is that the full assessment of £18,568.15 would fall on the Appellant.  The Appellant appealed against these Directions on 21 August 2007
3.	On 10 December 2007 the Appellant was assessed to a penalty of £5,557.74 under s95(1)(a) for negligently delivering an incorrect tax return.  He appealed this on 7 January 2008.
4.	Today’s hearing was to decide all three appeals.
The legal issue on the pension fund transfer
5.	At the time of the payment out of the Appellant’s existing authorised personal pension schemes s647 Income and Corporation Taxes Act 1988 applied.  This provided as follows:
Section 647 Unauthorised payments
(1) This section applies to any payment within subsection (2) below which is made—
(a) out of funds which are or have been held for the purposes of a personal pension scheme which is or has at any time been approved; and
(b) to or for the benefit of an individual who has made personal pension arrangements in accordance with the scheme.

(2) A payment is within this subsection if—
(a) it is not expressly authorised by the rules of the scheme; or
(b) it is made at a time when the scheme or the arrangements are not approved and it would not have been expressly authorised by the rules of the scheme or by the arrangements when the scheme, or as the case may be the arrangements, were last so approved.
(3) The individual referred to in subsection (1)(b) above, whether or not he is the recipient of the payment, shall be chargeable to tax under Schedule E on the amount of the payment for the year of assessment in which the payment is made.

(4) This section applies to a transfer of assets or other transfer of money's worth as it applies to a payment, and in relation to such a transfer the reference in subsection (3) above to the amount of the payment shall be read as a reference to the value of the transfer.

6.	It was not disputed that the pension schemes from which the transfers were made were within s647(1) as comprising funds held for the purposes of an approved personal pension scheme.  It was agreed that that the Appellant had belonged to two approved personal pension schemes, the Allied Dunbar Personal Pension Scheme (“the Allied Dunbar Scheme) and the Scottish Mutual  Appropriate Personal Pension Scheme (“the Scottish Mutual Scheme”).
7.	On 23 August 2001, the Appellant’s accrued benefits of £18,027.59 in the Allied Dunbar Scheme were transferred to another plan. On 29 August 2001 the Appellant’s accrued benefits in the Scottish Mutual Scheme of £37,326.95 were also transferred to that same plan.  It was not disputed that the transfers were for the benefit of the Appellant.
8.	The dispute in this case was whether the payments out of the pension funds were within s647(2)(a).  In other words were the transfers “not expressly authorised by the rules of the scheme”?  The Scottish Mutual Scheme contained  the following provisions at clause 12
“Transfer payments.  The Scheme Administrator may, however, at the written request of a Member transfer the Member’s Fund ….to another scheme of which he or she has become a member.  …..
The Member’s Fund may be transferred to: - 
(1)	another Approved Personal Pension Scheme;
(2)	an occupational pension scheme approved under Chapter 1 of Part XIV of the Act to which the Member’s Employer contributes or has contributed;….
9.	The Allied Dunbar Scheme had almost identical terms in its clause 12:
“…the Scheme Administrator may, nevertheless, at the written request of a Member transfer the Member’s fund….to another scheme of which he or she has become a member…..
The Member’s Fund may be transferred to: - 
(1)	another Approved Personal Pension Scheme;
(2)	an occupational pension scheme approved under Chapter 1 of Part XIV of the Act to which the Member’s Employer contributes or has contributed;….
10.	The pension scheme to which the payments in question were transferred was the Holme Limited Pension Plan (“the Holme Plan”).  The Holme Plan was approved by HMRC under Chapter 1 Part XIV Income and Corporation Taxes Act 1988 with effect from 1 February 2001.  It was not disputed that the Appellant had made a written request for the whole of his fund in the two Schemes to be transferred to the Holme Plan.  Whether the transfers were “expressly authorised by the rules of the scheme” depended on whether the Appellant was properly a member of the Holme Plan as the rules of the two Schemes only authorised a transfer to a fund of which the beneficiary was a member.
11.	The Holme Plan conditions included the following:
“3.8  The Trustees may at the request of a Member accept from the administrators of any fund scheme…..any transfer of moneys (“Transfer Value”) in respect of the Member subject to the following conditions: - ……”
12.	“Member” was not in the list of definitions in the deed but clearly meant an employee of the Principle Employer (as defined) because the deed provided:
2.1 An Employer may in its absolute discretion invite any one of its Employees who has not attained the Normal Retirement Age to become a Member of the Plan…….
2.2 An Employee who accepts an invitation from his Employer to join the Plan shall apply to become a Member in manner and form…..etc
13.	“Employer” was defined to be any of the companies which made up the “Principle Employer” and that comprised Holme Limited and certain other associated companies which had HMRC’s consent and had bound themselves by deed to the scheme rules:  it was not suggested that in this case the Employer was any company other than Holme Limited.  There was nothing in the deed to suggest that anyone other than an employee could be invited to become a member.
14.	All parties were agreed in this case that the Holme Plan required the Appellant to be an employee of Holme Limited in order to be a Member of the Holme Plan.  This was not disputed in the hearing and the Tribunal agrees that the Holme Plan required a Member to be an employee.    The parties did not dispute – and the Tribunal agrees - that the transfer of the Appellant’s funds from the two Schemes to the Holme Plan was only authorised by the rules of the two Schemes (as required by s647(2)(a)) if the Appellant was an employee of Holme Ltd.
15.	Indeed, the rules of the two Schemes actually require the occupational pension scheme to which the transfers are made not only to be approved under Chapter 1 of Part XIV of the Act but also to be one to which the Member’s employer contributes or has contributed.  So again this is a requirement for the Appellant to be employed by Holme Ltd (as Holme Ltd was the contributor to the Holme Plan).
The law on employment
16.	  The dispute between the parties therefore centred on whether or not the Appellant was an employee of Holme Limited.  HMRC cited Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497. In his judgment at page 515 Mackenna J said as follows:
“A contract of service exists if these three conditions are fulfilled. (i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in performance of some service for his master.  (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.  (iii) The other provisions of this contract are consistent with its being a contract of service.”
17.	It is clear that at least in that case, the Judge was of the opinion that the difficult question to answer was (iii) as he said “I need say little about (i) and (ii)….the third and negative condition is for my purpose the important one”  He went on to provide five examples to explain what he considered to be provisions inconsistent with a contract of service (employment).  His conclusion was that “An obligation to do work subject to the other party’s control is a necessary, though not always a sufficient, condition of a contract of service.”  In other words, it cannot be a contract of service (an employment contract in more modern language) unless the employee is subject to the employer’s control.  Even where there is control, it is not necessarily an employment contract.
18.	Although the judge concentrated on (iii) he did expand slightly on what he meant in (i) and (ii):
“As to (i).  There must be a wage or other remuneration.  Otherwise there will be no consideration, and without consideration no contract of any kind.  The servant must be obliged to provide his own work and skill.  Freedom to do a job either by one’s one hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be…..
As to (ii).  Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done.   All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant…….”
19.	HMRC also referred me to Carmichael and another v National Power plc [2000] IRLR 43 (House of Lords).  In that case Lord Irvine referred in paragraph 18 of his decision to “an irreducible minimum of mutual obligation necessary to create a contract of service”.  He decided that where the alleged employer was not obliged to provide work and the worker was not obliged to undertake work there was a lack of the minimum of mutual obligation required for the contract to be one of employment.  
Questions for the Tribunal
20.	As I have said, the parties agreed that the main question in front of the Tribunal was whether the Appellant was employed by Holme Limited.  From the authorities cited above, the Tribunal accepts that it must resolve this question by deciding the following:
•	Whether the Appellant was paid?
•	Whether he was obliged to undertake work for Holme Ltd?
•	Whether, if he was, what he did was in any way controlled or dictated by Holme Ltd?
•	And if there were any terms incompatible with it being a contract of employment?
The evidence before the tribunal
21.	The case turned on whether or not the Appellant had been employed by Holme Limited.  The evidence of the Appellant was very relevant to this.  However, the Tribunal treated what the Appellant said with some scepticism as it found the Appellant to be an unreliable witness.  He changed his evidence during the hearing on one matter:  in particular he originally informed me that he no longer possessed a copy of his employment contract (and this was consistent with what he had said to HMRC over the years).  Later in the hearing he told me that he did have it but had left it at home.  His unreliability was also demonstrated in that at the hearing he gave a version of the events which led to his involvement with Holme Ltd which contradicted the story he told to HMRC in a letter in 2004:  in particular his original story was that he was cold called by telephone canvassers but at the hearing he said he was introduced by his friend Tom Branigan.  Although this was the most stark example, in general his evidence at the hearing did not entirely correlate with what he had said in letters to HMRC.  I conclude he was not a reliable witness.
The context of the alleged employment
22.	The main question in this hearing was whether the Appellant was employed by Holme Limited.  The Appellant says that he was and HMRC maintain that he was not.  The motive of the alleged employer and employee in entering into a contract is relevant to that issue:  did they intend to create a contract of employment or did they merely intend to create the appearance of a contract of employment? 
23.	HMRC made the point in letters to the Appellant over the years as well as at the hearing that they did not consider his alleged employment to be genuine.  In a number of letters it was referred to as a sham or pretence.  HMRC’s case was that this was a pension liberation scheme.  They considered that a third party had set up Holme Ltd and the Holme Ltd Pension Plan with the object of taking a commission on pension fund liberation.  HMRC considered the scheme operators persuaded persons who wished to realise their pension funds before their retirement age to become sham employees of Holme Ltd.  A participator in the scheme would then request the transfer of his pension funds from his legitimate approved pension schemes to the Holme Plan.  The Holme Plan used the would-be employee’s funds to buy an annuity which the would-be employee could then use as security for an interest-free loan.  The idea, HMRC alleged, was that the annuity would never be paid to the employee but similarly the loan would never be called in.  HMRC alleged that the organiser of the scam would earn commission of 20% of the funds. If successful, the scheme would therefore leave the participators with 80% of the value of their pension fund as cash in hand at the current date rather than with 100% tied up in an pension fund inaccessible until they reached retirement age.
24.	Mr Bush gave evidence on behalf of HMRC. He was an officer of HMRC with their Pension Schemes Services and in 2001 he was investigating pension liberation or “trust busting”.   His detailed witness statement gave evidence that Holme Ltd was incorporated on 12 December 2000.  HMRC received an application from Clerical Medical Investment Group Limited on 19 June 2001 for the approval of the Holme Ltd Pension Plan which was a wholly insured scheme with Clerical Medical (meaning that the entire funds of the scheme would be invested in Clerical Medical insurance policies).  On 13 July 2001 HMRC approved the Holme Plan.
25.	There were 224 members of the Holme Plan and for all but 5 of them (for whom no salary was shown) the salary was stated to be £6,000.  Holme Ltd filed a P35 which also showed these employees:  three quarters of them commenced employment in July 2001 (the remainder joined in February, August and October 2001).
26.	One of the exhibits to the witness statement was the Holme Ltd brochure.  This did not appear to the Tribunal to be a brochure aimed at attracting genuine employees:  its few lines on what the job entailed were vague and the emphasis (though not a great deal of clarity) was on its employee benefits.
27.	The Appellant’s agent accepted at the hearing that on the papers the arrangements looked like a “scam” but said that in his client’s case the employment was genuine and no loan back had been taken.    The Appellant’s oral evidence was that he agreed that there were pension fund liberation scams on the market and that if he “joined it to withdraw the money it’s a scam” but that he was sure that this scheme was “straight”.  He also said that everyone in the Holme scheme was offered the loan but that he had  refused it. 
28.	As stated above, it was not disputed that the Appellant did request a transfer into the Holme Plan of his accrued pension benefits.  It was also not disputed that the transferred benefits were used to purchase a deferred annuity.  A copy of the Annuity Certificate was produced to the Tribunal and shows that the annuity was purchased on 4 September 2001 for £55,354.54 (the total of his funds in the Allied Dunbar and Scottish Mutual schemes).  The annuity is to pay £18,154.08 per annum from the Appellant’s 75th birthday on 3rd October 2030.  It is payable by the Members Insurance Company Limited registered and based in Niue.
29.	 The Tribunal accepts the evidence of HMRC, which was not really disputed by the Appellant, and finds that Holme Ltd and the Holme Plan were set up with the object of pension liberation.  The motivation of the persons behind the operation of the company and its pension plan was no doubt to earn the 20% commission on the funds liberated.  This is relevant to the question of whether the Appellant was actually employed by Holme Ltd as it is clear to the Tribunal that the object of Holme Ltd and its directors was not to employ the would-be employees including the Appellant but to give the appearance of employment sufficient for the would-be employees’ accrued pension funds to be transferred into the Holme Plan.
30.	HMRC were also of the opinion that the Appellant’s motivation in joining the scheme was to access his pension funds before the time intended by law.  They did not accept that he had not received the loan back (although they had no evidence that he had received the loan).  In particular they doubted that he was content to exchange his accrued pension benefits for an annuity to be paid by a company based in Niue.
31.	The Appellant claimed that his employment was genuine and this was evidenced by the fact that (he said) he had not received a loan back and therefore his purpose in becoming an employee of Holme Limited had not been pension liberation as alleged by HMRC. Rather, the Appellant said he was interested in the job offered because it gave him opportunities of cross selling between the clients of his Holme Ltd business with clients of his business as an independent financial adviser.  The Tribunal did not accept this evidence – for the reasons set out in paragraph 43 below.  However, the Appellant’s evidence was that his major motive in becoming an employee was the pension arrangements.  
32.	The Appellant’s evidence was that he preferred his funds to be used to buy an annuity than invested in the stock market.  He said he had lost confidence in the stock market and wanted the security a guaranteed annuity would provide.  He said he was not concerned that the company giving the annuity was based in Niue and, by referring to the recent financial difficulties of companies like Lehman Brothers and Northern Rock, implied he thought his money as safe there as anywhere.  He denied that the annuity had been used as security for a loan back.  He produced his bank statements to HMRC for the period in question which showed no unexplained large sums being deposited to his credit.
33.	The Tribunal does not accept the Appellant’s evidence on this.  Although it may well be that the Appellant did not wish to leave his pension funds invested in the stock market, it is in the view of the Tribunal inherently improbable that he would be prepared to exchange his funds for an annuity commencing 2030 to be paid by a company based in Niue.  He did not suggest that he had investigated what realistically enforceable rights he would have if the company reneged on paying the annuity, nor any reason (such as other financial provision) why the annuity should be deferred to age 75. The Tribunal did not find the Appellant to be a witness of truth and therefore does not accept his unlikely explanation.  The tribunal’s finding of fact is that he received his funds as a loan back secured on the annuity.  
34.	The Tribunal also considers that liberating his pension fund in the manner described above was the Appellant’s motive in entering into his arrangements with Holme Limited, and therefore it was not his intention to become an employee of Holme Limited but to appear to be an employee of Holme Limited.
What were the terms of the alleged employment?
35.	The Tribunal went on to consider, bearing in mind its finding that the motivation of both the alleged employer and employee was “trust busting” rather than any desire to create actual employment, whether in fact there was an employment contract.
36.	The Appellant’s case was that he was an employee of Holme Ltd.  Further, that he knew of at least one other person who had become an employee in similar circumstances and HMRC had accepted that he was an employee.  
37.	The Appellant’s agent also put the point that they considered it unfair that  HMRC were claiming that the Appellant was not employed as (they said) it was his experience that HMRC normally  claim a taxpayer is employed rather than self-employed.  The Appellant also said that the fact he had no fixed hours should not count against him as it is normal in sales for people to have the choice of when to work.
Did he have a written contract of employment?
38.	The Appellant has consistently maintained that he did have a written contract of employment (although, as stated above, he changed his evidence on whether he had lost it or whether he had just left it at home).  
39.	HMRC’s witness, Mr Bush, an officer of HMRC in their Pension Schemes Services, produced as an exhibit to his witness statement an employment contract produced by some of the persons investigated by HMRC in connection with the Holme Plan.  His evidence was that these persons similarly had their funds transferred to the Holme Plan and claimed to be employees of Holme Ltd. He said the contracts were all identical.  The Appellant’s evidence was that his employment contract was identical to this one produced by HMRC.  As HMRC’s evidence was that where the would-be employees were provided with a contract of employment it was identical,  it would seem more likely than not that if the Appellant had had one, it would have been in identical terms to the one produced by HMRC, as follows:
“Appointment
Your appointment as Sales Associate is a permanent employed position subject to a 13 week probationary period.
Job objective
To demonstrate and sell those products currently being marketed by Holme Ltd.
Area of Operation
Free choice
Method of Remuneration
Basic salary + commission
You will receive a basic salary of £240.00 per annum payable in arrears with payments being made on the last working day of each month.
This will be reviewed periodically by the Directors.
Commission
You will also be entitled to commission from your date of employment which will vary according to those products being marketed, and which you will be advised of as and when required.
Expenses
You will be responsible for all expenses incurred in the course of your employment.
Hours of work
There are no fixed hours of employment but you will be expected to devote such of your time to work as may be required to achieve the necessary standards as discussed with your Area Manager.
Reporting
You will report directly to your area manager
Pension scheme
As an employee you are eligible to join the company pension scheme details of which will be provided to you shortly.”
40.	Even if there was a written agreement between the Appellant and Holme Ltd, it does not help his case as firstly, the terms of the written contract were a sham as I have already found that the motive of both parties in entering into it was to create the appearance of employment rather than actual employment.  Secondly, on the face of it, the written contract does not even necessarily create employment as it does not positively require the employee to do any work.  So whether or not the Appellant ever had a written contract, the tribunal needs to look at what he did to determine whether he was employed.
What work did he do?
41.	The undisputed evidence was that the only available work was to sell brochures on commission. The brochures, if purchased, had a voucher which would allow the purchaser to stay in certain hotels free of charge for 3 days on condition that they purchased both breakfast and evening meal.  In a letter to HMRC in 2005 the Appellant said he could not recall how many he had sold and kept no records.  He also said he could not recall the selling price, although at the hearing he said his commission was £25 per brochure.  He said he did not have a sales manager.  He said he left employment with Holme due to a “lack of products”.  He agrees he had no fixed hours and only “worked” for a few months.  He would not be paid if he did not sell.  At the hearing he said that as he had his own office with a reception area, he set up a stand and displayed the brochures.  He also said he showed the brochures to his own clients (his business was as an IFA).  
42.	The tribunal has found evidence from the Appellant to be unreliable but believes it inherently unlikely that the Appellant’s evidence at the hearing would have understated what he actually did.  My conclusion is that he did no more than set up a stand displaying the brochures in the office he used for his own business as an independent financial adviser.
43.	The Tribunal’s conclusion is also that the Appellant did not actually sell any brochures at all. He does not appear to have been paid any commission. Although the P14 records he was paid £160 the Tribunal does not find that he was paid this money (see below), and, even if he was, it would appear to be payment of the retainer provided for in the contract and not payment of commission.  HMRC’s evidence, which was hearsay but which the tribunal accepts given the nature of the brochures, is that most of the other 224 persons in the scheme had informed HMRC either that they had not tried to sell the brochures or had tried to sell them and found it too difficult.  It seems unlikely to the Tribunal that the Appellant actively promoted these brochures to his IFA clients.  He would have risked annoying his clients seeking financial advice if he had tried to sell them brochures giving discounts on short term hotel breaks.  For all these reasons the Tribunal concludes that the Appellant did not actually sell any brochures at all.
44.	More importantly, the Tribunal finds that he was under no obligation to Holme Ltd to devote time to selling the brochures.   There is no evidence there was any pressure to spend time selling the brochures:  the Appellant himself agreed he was not obliged to spend time working for Holme Ltd.   The written contract was there to give the appearance of a contract of employment but even on the face of it, the would-be employees were not required to devote any time to selling.  It provides “There are no fixed hours of employment but you will be expected to devote such of your time to work as may be required to achieve the necessary standards as discussed with your Area Manager.”  There is no evidence that there were any area managers or discussions with them in which minimum hours would have been set.  The Tribunal’s conclusion is that the Appellant was not required by his alleged contract of employment to devote any time to work and in particular to selling the brochures.
45.	The agreement between the Appellant and Holme Ltd therefore fails to fulfil one of the necessary prerequisites for a contract of employment to exist, as set out by Mackenna J in Ready Mixed Contract that “(i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in performance of some service for his master.”  The Tribunal has found that he did not agree that he would perform a service (in this case selling the brochures).  At best it was an agreement under which he would be paid if he did sell the brochures.  It did not oblige him to spend a minimum amount of time carrying out work for Holme Ltd.
Did he have a manager?
46.	His evidence was inconsistent in that in his 2005 letter he said he had no manager and, although he repeated this at the hearing, he also said he reported to head office.  The written contract says that the employee must report to the area manager (despite the contract also providing that the employee had free choice on area of operation suggesting there would be no area manager).
47.	The Tribunal finds that the Appellant did not have a manager and did not report to anyone.  This finding is based on (1) my finding earlier that neither Holme Ltd nor the Appellant actually intended to create a real employment situation, (2) no credible evidence was given that a manager at head office or otherwise had actually existed and (3) working on the presumption that the Appellant would not have understated the position, it seems on his own evidence that he had very little contact indeed with anyone from Holme Limited.
48.	The agreement between the Appellant and Holme Ltd therefore fails to fulfil another of the necessary prerequisites for a contract of employment to exist, as set out by Mackenna J in Ready Mixed Contract that “(ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.”
Was he paid?
49.	The Appellant did not return any income from his connection with Holme Ltd.  Holme Ltd completed a P14 end of year summary for 2001-2 for the Appellant which showed that he earned £160 and that Holme deducted £35.20 in tax.  The P14 also shows his starting date as 1 July 2001 and leaving date as 22 February 2002. Pay of £160 is in fact consistent with the written contract:  8 months work at £240 per annum would equate to £160.  It seems very likely that the PAYE was paid:  the Respondents, who were uniquely in the position of being able to know whether PAYE was accounted for, did not suggest to the Tribunal that the PAYE had not been paid.  Whether the P14 was correct in showing £160 paid to the Appellant is another matter.  The Appellant said that he was paid the money but being such a small sum had forgotten it when he completed his tax return.
50.	The Tribunal finds that more likely than not the Appellant was not paid £160 or any other sum by Holme Ltd.  This finding is made on the basis (1) the Tribunal disregards the Appellant’s evidence that he was paid on the basis the Tribunal did not find him to be a reliable witness, (2) the Appellant did not return any income from Holme Ltd in his tax return at the time thus indicating he had not in fact received any and (3) the Tribunal has found the scheme to be a sham and in the view of the Tribunal it is unlikely that organisers of that scam would part with money unnecessarily.
51.	In any event, even had the Tribunal reached a contrary view on this, it would not help the Appellant’s case.  £160 is only a nominal sum and even if paid is unlikely to be the consideration for employment.  In any event the other tests of employment are failed.
Conclusion on question of employment
52.	The Tribunal finds that the Appellant was not an employee of Holme Ltd.  In summary, the written agreement if the Appellant even had one was a sham (and even if it wasn’t, it wouldn’t necessarily have created employment).  The actual agreement between the Appellant and Holme Ltd – to the extent one existed at all - lacked the “irreducible minimum of mutual obligation necessary to create a contract of service” required by law.  Holme Ltd exercised no control over what the Appellant did and the Appellant was under no obligation to perform any service. The Appellant in fact made no sales and was not paid commission or indeed any sum of money. Further, neither party intended to actually be a party to an employment contract with the other:  both parties merely wished to give the appearance of it.  It was a sham.
53.	Mr Chong may be right that HMRC are in many cases reluctant to agree that a person is self-employed rather than employed but that is neither here nor there:  on the facts of this case at least there was no employment.  Further, salesmen can no doubt be employees, but, as per Ready Mixed Concrete and Carmichael, they are not employees where there is no obligation to work.
54.	Having decided that in this case there was no contract with the “irreducible minimum of mutual obligation necessary to create a contract of service”, there is no need for the Tribunal to consider the fourth question above, which was if any of the terms of the contract were inconsistent with a contract of employment.  
55.	This concludes the first part of the appeal.  The finding of the Tribunal is that the transfer of funds was an unauthorised transfer of the Appellant’s funds out of the two authorised pension schemes.  The Appellant is liable to tax under S647(3) Income and Corporation Taxes Act 1988 as the transfer out was for his benefit.  There was no suggestion that the Appellant considered that the quantum of the assessment of £18,568.15 was wrong and I therefore uphold it.
Equal Treatment
56.	The undisputed evidence at the hearing was that some 224 persons were involved with the Holme Ltd pension fund liberation scheme.   It was HMRC’s undisputed evidence that most of these persons later admitted to having loan backs and settled their liability to tax under s647(3).  
57.	The Appellant, however, considered it unfair that one of the taxpayers in the scheme, personally known to the him, was not required by HMRC to pay the tax.  He considered that this was because HMRC had formed the view that he genuinely was an employee.
58.	HMRC denied this.  The admitted that they had chosen not to pursue this particular taxpayer but that was not because they had concluded he was not an employee.  Mr Bush’s evidence was that due to the relatively small sum involved and the fact the taxpayer was no longer a UK resident, HMRC had decided it was not worthwhile pursuing the liability.  Mr Bush was at liberty to disclose this information to the Tribunal under the Commissioners for Revenue and Customs Act 2005 section 18(2)(c) which permits disclosure of confidential taxpayer information in civil proceedings. 
59.	The Tribunal accepted HMRC’s explanation.  Indeed, having heard the explanation, the Appellant’s agent seemed to accept it.  At the time of the hearing I was not inclined to think the evidence relevant:  if HMRC were shown to be treating taxpayers unequally without good reason then it would be a matter for judicial review but not for the Tribunal.  However, in view of the recent opinion expressed by Mr Justice Sales in the High Court decision in Oxfam [2009] EWHC 3078 (Ch) in which he said that taxpayers who wish to challenge a decision of HMRC on public law grounds (such as challenging HMRC’s exercise of its discretion) can do so in a Tribunal hearing, I have reconsidered. My conclusion is that it does not help the Appellant’s case:  even if and to the extent that the Tribunal may have jurisdiction to consider public law matters, on the facts there is no evidence that HMRC failed to treat the taxpayers equally without good reason.  In particular they appear to have pursued nearly all the taxpayers in the scheme but in one case decided that the expense of pursuing someone now no longer resident in the UK for the amount of tax at stake in that case was not financially viable.  This seems to me a reasonable exercise of their discretion and I do not think the Appellant has grounds for complaint.
Decision on Directions
60.	HMRC wrote to Allied Dunbar Assurance plc (“Allied Dunbar”) on 28 March 2007 stating that the trustees of the Allied Dunbar Scheme were liable to tax of £3,966.07 on the unauthorised transfer of the Appellant’s funds.  This is because in HMRC’s view the effect of s647 and 203 ICTA 88 and the Income Tax (Employments) Regulations 1993/744 is that the payment was liable to PAYE.  The letter invited the trustees, if they believed they took reasonable care to comply with the PAYE regulations and that the failure to deduct PAYE was an error made in bood faith, to make a formal request under Regulation 72A Income Tax (PAYE) Regulations SI 2003/2862 for a Direction by HMRC that they were not liable to pay the excess tax to HMRC.
61.	An almost identical letter was sent on the same date to the Scottish Mutual Assurance plc in respect of PAYE of £8,211.93.
62.	No one disputed that the transfers out of the two pension funds were, if unauthorised, subject to PAYE under s203 ICTA 88.  The appeal was that HMRC should not have made the Directions which exempted the two pension trustees from liability to that PAYE, with the effect that liability for the full tax (£18, 568.15) fell on the Appellant.  
63.	In its application to be excused the PAYE liability, Allied Dunbar (by then Zurich Assurance) said that it believed it had taken reasonable care to comply with the law.  It said that it had responded to the Appellant’s request for the transfer, and ensured that it had the required transfer forms and the scheme’s HMRC approval letter.  Zurich enclosed copies of these documents with its letter.  HMRC’s reply of 26th July 2007 was to make the required Direction stating that “we are satisfied that you took reasonable care to deduct the correct amount of tax from the relevant payments you made but, due to an error made in goods faith, deducted too little.”
64.	The Scottish Mutual’s reply was similarly that they had followed all the rules, legislation and guidelines available at the time and did not knowingly make a suspicious transfer.  They enclosed copies of the transfer form and the Holme Plan approval letter from HMRC.  HMRC issued a letter in response on 26th July 2007 in almost identical terms to the one issued to Zurich Assurance, making the Direction that they were not liable for the PAYE on the transfer of the funds.
65.	At the hearing HMRC invited me to uphold the directions as properly made for the reasons given in the letters.  I asked the Appellant’s agent to address me on this issue in his closing submission.  His closing submission was to sum up his view that the Appellant was an employee of Holme Ltd.  I conclude therefore that the grounds of the appeal against these Directions are simply that the amendment of the Appellant’s return was wrong:  neither the Appellant nor his agent suggested any other grounds on which they considered the Directions to be wrong.
66.	I have upheld the amendment of the Appellant’s return.  No case has been put to me that the Directions were wrong in the sense that Allied Dunbar or Scottish Mutual had failed to take reasonable care or had not acted in good faith.  I have seen nothing in the evidence before me to suggest otherwise.  Therefore, I uphold the Directions.
67.	I would mention that had there been evidence before the Tribunal that either pension fund had failed to take reasonable care or act in good faith, it seems to me that I would have had to adjourn the hearing to allow them to apply to be made parties as it is not clear to me that they had been invited to be parties to this case despite having a financial interest in the outcome.
Decision on penalty
68.	HMRC invited me to uphold the penalty on the grounds it was properly made for the reasons set out in HMRC’s letter to the Appellant of 10 December 2007.  In that letter HMRC said that the Appellant “negligently delivered an incorrect return for the year ended 5 April 2002”.  They went on to say that as an IFA he ought to have known that his pension transfer was not in accordance with the law.  They then said they were mitigating the penalty 15% for disclosure, 35% for cooperation and 20% for seriousness.  This led to a 30% penalty being charged in the sum of £5,557.74.
69.	I asked the Appellant’s agent to address me on this issue in his closing submission but as stated above his closing submission was to repeat his view that the Appellant was an employee of Holme Ltd.  He mentioned no other grounds of appeal against the penalty.  It seems to me therefore that the ground of appeal is that the Appellant believes that the penalty was not due because the return was not wrong, which (as I have found the return was wrong) could be taken to mean that he considered that it was not negligent to make the wrong return because he believed that it was right.
70.	I have already found that the scheme in which he participated was a scam and that his motive in joining it was to gain access to his pension fund before he was entitled to do so.  I have also found that he claimed to be an employee when he was not and that he knew the employment contract was a sham.  In these circumstances he was at the least negligent in completing his tax return in not drawing the transfer of funds to the attention of HMRC.  
71.	The mitigation of the penalty by HMRC from 100% to 30% in these circumstances seems if anything generous to me and I will not reduce it further.
72.	The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE
RELEASE DATE: 11 December 2009