20665

VAT – Independently carrying on an economic activity – Article 4 Sixth Directive – Bound by employment contract – Or employment relationship regarding working conditions, remuneration, employer’s liability – Whether driver working for taxi firm was independent
VAT – Registered person – Whether Appellant provided services in partnership or on his own account

LONDON TRIBUNAL CENTRE

	MARTIN DAVID TALBOT	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	CHARLES HELLIER (Chairman)
						KEITH DUGDALE

Sitting in public in Norwich on 30 January 2008

Mr Talbot in person

Alex Ruck Keene, counsel, instructed by the solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Mr Talbot appeals against a VAT assessment made by the Respondents on 20 November 2006 in respect of the periods 01/04 (the quarter ending on 31 January 2004) to 04/06 (the quarter ending on 30 April 2006).

2.	The assessments are in respect of income earned from work which Mr Talbot did for Atlas Cars (and to a small extent for M&R Cars).  From March 2004 onwards he drove a car providing cab driving services for Atlas Cars’ customers. During this period he was VAT registered. The Respondents say that the income was in respect of taxable supplies rendered by Mr Talbot and that since he was a registered person VAT is due.  Mr Talbot argues: first that any supply was made not by him alone but by a partnership between him and his wife which was not a registered entity and that since its supplies fell below the Regulation threshold no VAT was due; and second (and in the alternative) that the nature of his engagement with Atlas Cars was that of employment and as a result any supply he made was not VATable.

3.	The two issues before us were therefore:-

(i)	whether at any time a partnership existed between Mr Talbot and his wife the business of which was the supply of Mr Talbot’s services of driving; and
(ii)	whether, to use the language of the Sixth Directive, Mr Talbot was “independently” carrying out the supply of services or instead was carrying them out as an ‘employee’ within the meaning of Article 4(4) of that 	Directive.

There was also a subsidiary issue in relation to the netting of radio rental to which we shall return at the end of the decision.

4.	The legislation

(a)	provisions dealing with the relevant taxable person
Section 4 VAT Act 1994 provides that VAT shall be charged on the supply of services where it is a taxable supply made by a taxable person.  Section 3 provides that a person is taxable while he is registered under the Act or required to be registered.

Section 45 of the Act provides that the registration of persons carrying on business in partnership may be in the name of the firm; Schedule 1 to the Act deals with registration providing inter alia that a person becomes registrable when his taxable supplies exceed a threshold.

It seems to us that where persons are carrying on business together in partnership the scheme of the Act is to have regard to those persons together and to provide for their registration as a single group rather than for individual registration of each partner, and that it is in relation to supplies made by that partnership that they are liable to tax by virtue of being so registered or registrable, and that as a result any supplies made by them individually and not through the partnership are not taxable by virtue of the partnership’s registrability, and conversely that they are not individually to be treated as making the supplies made by the partnership.  As a result if Mr Talbot’s driving supply was made by a partnership of himself and his wife, it would not be taxable as a supply made by Mr Talbot. If that were the case his own separate pre-existing registration would not render him liable to VAT in respect of that supply.

At the relevant time the Partnership Act 1890 governed partnership matters.  Section 1 of that Act provided that a “partnership is the relationship which subsists between persons carrying on a business in common with a view of profit.”  Section 2 of the Act contained provisions related to the determination of whether or not a partnership existed.  It contained the following provisions:-

“(1)	… common property, or part ownership does not of itself create a partnership …

(3)	The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a share … does not itself make him a partner in the business.

Because the enactment of section 45 is pursuant to a permission granted to Member States by Article 4(4) of the Sixth Directive, and because, in our view, that permission does not impose requirements which affect the scope of section 45, the determination of whether or not persons are in partnership will be a matter of domestic law determined under the Partnership Act’s provisions.

(b)	provisions relating to the nature of the supply

Section 5 VATA provides that anything which is not a supply of goods but is done for a consideration is a supply of services.  It contains no exclusion of the provision of services in the course of an employment.

However Article 4 of the Sixth Directive provides that a taxable person was any person who “independently carries out … any economic activity …”, and Article 4(4) provided:-

“4.	The use of the word “independently” in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.”

Mr Ruck Keene accepted that if Mr Talbot’s activity was within the exclusion in Article 4, it would not constitute the making of taxable supplies for the purpose of VATA.

The Evidence and the facts

5.	We heard oral evidence from Mr Talbot and from Robert Christie an officer of HMRC working in the direct tax area.  Mr Christie provided a witness statement.  We also had witness statements (whose content was accepted by Mr Talbot) from Andrew Wilkins and Megan Currie two of the Respondents’ indirect tax officers who had been involved in the Appellant’s affairs.  We also had a bundle of copy correspondence.  We find the following facts:

(1)	From 2 May 1979 Mr Talbot was VAT registered as the sole proprietor 	of a business originally named Martel Software Services, and later 	Martel Consultancy Programming Services.  In this capacity Mr Talbot 	supplied his services to Martel Computer Software Services Limited 	(‘Limited’) which in turn supplied them to a client of a computer 	software agency.

(2)	In 2001, as a result of the enactment of what is commonly known as 	the IR 35 legislation, this structure for the provision of Mr Talbot’s 	services became less fiscally advantageous.  He therefore ceased to 	provide his services under it and ceased to make VATable supplies to 	Limited.

(3)	Following this change Mr Talbot remained VAT registered and did not 	seek the cancellation of his registration. He continued to make VAT 	returns: periods 07/01 to 10/04 were small repayment returns and 	periods 01/05 to 10/06 were nil returns.  He told us, and we accept, that 	he maintained his VAT registration in the hope that he might later start 	in business again.

(4)	In November 2002 Mr Talbot’s source of computer consultancy work 	dried up, and for almost a year he was out of work. He therefore 	looked at the possibility of cab driving as a stop gap. He applied to 	Suffolk Coastal District Council for a driver’s badge and obtained it in 	October 2003.

(5)	Thereafter and until January 2004 he worked for a private hire cab 	company, M&R Cars. While working for them he was allocated one 	of their cars and worked set shifts.  His work for M&R Cars finished in 	January 2004 because the allocated vehicle became unroadworthy.

(6)	Mr Talbot told us, and we accept, that the “arrangement with M&R 	Cars was quite strict”, they required him to arrive 10 minutes prior to 	the start of a shift: failure to do so earned a warning, and two warnings 	earned dismissal.

(7)	At M&R Cars he drove customers allocated to him by that firm and 	collected fares from those customers according to the firm’s tariff.  At 	the end of a week he accounted to the firm for a sum equal to half the 	difference between the fares taken and the costs of refuelling the 	vehicle. The half he retained was his income for the week. No 	deductions were made for the use of the car or the radio.

(8)	The Respondents assessed Mr Talbot for £206.00 in respect of the 	period ending 31 January 2004.

(9)	After January 2004, and following 6 weeks without work, Mr Talbot’s wife suggested to him that he got her car “plated” by the Council as a private hire vehicle. But when he enquired he was told it was too small. They therefore decided to trade in her car for a larger vehicle. This they did on 10 March 2004. The new car, a Renault Laguna, was initially registered in Mrs Talbot’s name but later in Mr Talbot’s name as a result of the Council’s licensing requirements. Mrs Talbot paid the initial £450 of 	the £2,500 insurance premium.

(10)	On 12 March 2004, following his response to an advert by Atlas Cars 	for Owner Drivers, Mr Talbot took up work with Atlas Cars.  There 	was no written contract between Mr Talbot and Atlas Cars.  We find he 	worked under the following terms:-

(i)	Mr Talbot was to work using the Renault Laguna. He was 	responsible for, and bore the cost of, its maintenance and fuel;
(ii)	he was to work a 10 hour shift from 7.30am to 5.30pm for five 	days a week;
(iii)	he was to have an Atlas Cars radio for which he would pay a 	weekly rental;
(iv)	if he wished to take time off (e.g. for dental appointments) he 	was required to ask for it in advance; he was entitled to two 	weeks radio rent free holiday after 6 months service;
(v)	the customers were Atlas Cars contract customers or their cash 	paying customers;
(vi)	he was required to charge Atlas Cars tariff to their cash customers; some work was for prices agreed by the customers with Atlas Cars in advance and paid to Mr Talbot, and some for fares paid directly to Atlas Cars;
(vii)	he took instructions from Atlas Cars ‘Controller’ and was 	allocated jobs by the controller.  He could not refuse a job 	allocated to him;
(viii)	he was not permitted to send a replacement to cover his duties;
(ix)	he was required to display Atlas Cars’ logo while working on shift;
(x)	any receipts he issued were required to be an Atlas Cars pre-printed receipt forms;
(xi)	any cheques from customers were required to be made out to Atlas Cars;
(xii)	if he was late picking up a customer due to a late allocation of the job by the Controller, Atlas Cars would compensate the customer;
(xiii)	he was not allowed to obtain his own customers; all his work was derived from Atlas Cars;
(xiv)	he did not display his own address or phone number;
(xv)	he held a set of keys and the alarm security code for Atlas 	Cars’ premises;
(xvi)	occasionally he was required to transport Atlas Cars’ staff from 	home to work and vice versa without charge.
(xvii)	he was entitled to receive and retain an aggregate amount equal to each day’s daily takings (paid to him or Atlas Cars) less the rental 	for the radio.

As Mr Talbot said to us, he worked under Atlas Cars ‘strict rules’.

(11)	In both the case of M&R Cars and Atlas Cars there was a theoretical possibility that there would be no work for Mr Talbot to do.  However, nothing in what we heard suggested that this was a material risk, and we find it unlikely, although we find it likely that the amount of work would vary.

(12)	Mr and Mrs Talbot have a joint bank account. Mr Talbot maintains no 	separate bank account.

(13)	Mrs Talbot also works and has some available funds. Mr Talbot told us 	that if the expenses of driving exceeded the income then the deficit 	would be financed by his wife’s income and funds.

(14)	For the years ending 5 April 2004 to 2006, Mrs Talbot’s tax returns disclosed no income from the private car driving of Mr Talbot. All the income was or would be accounted for in Mr Talbot’s returns.

(15)	In March 2006 Mrs Erskine, one of the Respondents’ officers, came to 	see Mr Talbot to inspect his VAT records.  He explained to her that 	he was now doing private hire cab work.  Mr Talbot did not suggest  to 	Mrs Erskine at that time that he was in partnership with his wife in 	relation to that business.  Mrs Erskine asked for his business records 	for the private hire cab work and later in March wrote to indicate that 	he would be assessed to VAT for this work (and enclosing an 	application form to enable him to seek cancellation of his registration).

(16)	Mr Talbot then sought advice from Atlas Cars’ accountant who 	suggested to him that on the information he had been given Mr Talbot 	was making the supplies in partnership with his wife.

(17)	Atlas Cars’ accountant also agreed to speak to Mrs Erskine but did not 	do so.  Mr Talbot then sought the advice of his own accountant.  He 	was advised to seek registration of the partnership between himself and 	his wife with the direct tax side of HMRC. This was done in July 	2006.

(18)	HMRC gave the partnership notified to them a reference number and 	issued partnership return for the years 2004/05 and 2005/06 for 	completion. Mr Christie told us and we accept that HMRC had not 	given formal or detailed consideration to whether or not there was a 	partnership or as to when it began.

(19)	Mr Talbot told us, and we accept, that amendments would be made to 	Mrs Talbot’s tax return to reflect her membership of the partnership, 	but we did not understand him to say that that would affect the amount 	of her income as returned.

(20)	Mr Talbot’s accountant sought an opinion from the direct tax side of 	HMRC as to whether it was considered on the facts available to them 	that Mr Talbot was employed for Schedule E purposes.  On 4 August 	2006 Mr Andrew Burke wrote to indicate that in his opinion the 	financial risks borne by Mr Talbot indicated that he was not an 	employee but in business on his own account.

The Parties’ Arguments

6.	Mr Talbot says first that his services were supplied by two persons, his wife and himself in partnership and so not by him alone and accordingly that they were not taxable supplies by him as a registered person.  In support of this he says that the other arm of HMRC – the direct tax arm – have recognised the existence of the partnership by seeking returns for the partnership from 2003.  Second it is plain from his evidence and his correspondence  (he says in one fax:  “I have always regarded myself as an employee of Atlas Cars but responsible for my own Income Tax and National Insurance payments as an independent Self-Employed Driver.”) that there is an argument that his services were not independently supplied to the private hire firm, were thus not supplied by him as a taxable person, and so were not VATable supplies.

7.	Mr Ruck Keene puts the Commissioners’ arguments thus:-

(a)	in relation to the partnership question: 

(i)	there is insufficient evidence upon which to find that a 	partnership existed between Mr Talbot and his wife.  He points 	to the late emergence of the concept of a partnership in Mr 	Talbot’s dealings with HMRC, and Mr Talbot’s early 	references therein to ‘I’ rather than ‘we’ or ‘the partnership’;
(ii)	he says that in determining whether two persons are in business in common with a view of profit it is legitimate to take into account the relationship they thought they were entering into, and the evidence points to Mr and Mrs Talbot not recognising or thinking of their relationship as a partnership. Intent, he says, is an important part of a view of profit and doing something in common;
(iii)	the evidence points, not to a common enterprise with a view of 	profit, but to a wife coming to the aid of her husband by 	providing finance; and
(iv)	the apparent acceptance by the direct tax arm of HMRC even at 	its highest does not mean that there was a partnership.

(b)	in relation to the independence issue

(i)	the appellant provided his own vehicle, met its running costs 	and paid for a radio.  He was in business on his own account 	and was not an employee, he was therefore independent;
(ii)	the approach mandated by Article 4 is not inconsistent with the approach developed by the domestic courts to the determination of the relationship between a putative employee and putative employee, and  that by reference to that approach Mr Talbot would have been an employee. Mr Ruck Keene produced a helpful and fair written submission considering the available case law.

8.	Discussion

	(a)	the Partnership issue

We start by noting two points.  First the question of whether or not there was a partnership is one for us to determine on the evidence before us.  If HMRC have accepted that there is a partnership that is irrelevant to our decision.  Therefore it is also irrelevant whether or not HMRC’s direct tax arm’s actions in registering a partnership betokened acceptance that there was a partnership.

Second, although evidence of intention as to the operation of a business and the sharing of its revenues, profits and expenses can be relevant to whether or not a partnership exists, and accordingly evidence that parties did or did not intend there to be a partnership may be relevant to whether or not there is a partnership, the lack of any express consideration by the parties as to whether or not they wished to be a partnership is wholly irrelevant to whether or not a partnership existed.  And further the failure to address that issue at later times is even less relevant (if that is possible).

We now turn to the question of whether Mr and Mrs Talbot were carrying on a business in common with a view of profit.

First we have no doubt that during the Atlas Cars engagement there was a business being carried on: Mr Talbot’s labour and Mr and Mr Talbot’s car were being used to earn an income.  That activity was serious, earnestly pursued, had as its object the provision of services for payment, was of a substantial nature, and was not a hobby.  It had all the indicia of a business which was being carried on.

There are three factors which could point to this business being carried on in common by Mr and Mrs Talbot: the use of Mrs Talbot’s Renault Laguna, her payment of the first part of the insurance premium, and the possibility that she would finance any deficit.

But set against that there was no evidence of any other participation in the business by Mrs Talbot – no indication that she was in any way involved with Atlas Cars, or determining when the Renault should be refuelled or serviced or in driving for reward.  In addition the net profits of the business seem to have been treated as belonging wholly to Mr Talbot: whilst the sharing of profits may be an indication of partnership, the failure to share profits is at the least a clear pointer that the business was not carried on in common (see for example United Dominions Corporation Ltd v Brian Pty Ltd (1985) 60 ALR 741).  The payment of any profits into Mr and Mrs Talbot’s joint bank account does not to our minds indicate a sharing of profit: the income was by this means much available to Mrs Talbot but the profit was treated as that of Mr Talbot.

Putting these factors together we do not find that there was a business carried on in common; instead there was a business carried on by Mr Talbot using his wife’s car and with some initial financial support from his wife.  We therefore find that the supplies were made by Mr Talbot alone.

(b)	the Independence issue

We start by noting that the question of whether or not Mr Talbot independently supplies services is different from, although related to, the question of whether or not he is an employee under domestic law and for domestic income tax purposes.

Article 4(4) excludes an economic activity from being treated as carried on independently if either of two conditions is satisfied:-

(i)	the person is bound by a contract of employment under which the supply is made; or 
(ii)	the person is bound to “an employer” by other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and employer’s liability.

It seems to us that the concepts referred to in both of these limbs must be independent concepts of EU law and not concepts of domestic law, but there appears to be no case law of the ECJ which addresses what is meant in the first limb of this test by a “contract of employment”, and the UK cases to which we were referred appear to treat this phrase as being equivalent to its domestic meaning.  There are however two ECJ cases which relate to the second limb.  We consider each limb in turn.

A contract of employment

9.	In Patel v Customs and Excise Commissioners 1997 VATD 14956 the question was whether a sub-postmaster was carrying on an independent economic activity.  The tribunal said at paragraph 68: 

“The issue for the tribunal as a preliminary question is whether there exists a contract of employment between [the sub-postmaster] and POCL.  That in my judgment is, as counsel for the Commissioners submitted, a matter to be determined according to United Kingdom domestic law.”

10.	Having considered authorities such as Hall v Lorimer [1994] STC 23 the tribunal concluded that the sub-postmaster was engaged under a contract of service and that his services were not therefore independently supplied.

11.	In Customs and Excise Commissioners v Hodges [2000] STC 212, the tribunal had concluded that trainee jockeys were in relation to certain activities self-employed.  It reached that conclusion by reference to factors which under domestic case law pointed towards employment or self-employment.  In the High Court Moses J allowed an appeal against that decision on the grounds that there were errors of law in the decision and remitted the matter to a fresh tribunal.  The errors of law he identified were errors in the tribunal’s approach to the factors which in domestic law pointed towards employment or self-employment, and Article 4(4) played no significant part in his decision.  But in the penultimate part of his judgment he said:

“The real question, seems to me, whether the control exercised by the trainers was such that the personal services supplied by the [trainee jockeys] … should not be regarded as an independent supply …  I am unable to say that the true and only reasonable conclusion is that those jockeys were employed.”

12.	In Bray Walker v Commissioners of Customs and Excise VATD 18339, the question was whether services rendered by a solicitor as director of a company were VATable.  The tribunal set out Article 4(4) and considered whether the solicitor was an employee of the company by reference to domestic case law (but acknowledging that the cases they considered did not relate to Article 4).  It concluded that he was not.  It then turned to the second limb of Article 4(4) and held that the solicitor did not fall within those words.  There was no need for the tribunal in that case to consider the detail of that limb however.

13.	In the absence of any guidance on the meaning of contract of employment in Article 4(4), the best we can do is to look to the domestic approach to that term.  In that regard we note: the irreducible minimum requirements of some sort of control, an appropriate degree of obligation for personal service, and of lack of inconsistency with self-employment described by MacKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1967] 2 QB 497 at p.515; the touchstone of asking whether a person is in business on his own account described in Market Investigations Ltd v Minister of Social Security 1969 2 QB 173; and the overall need to look at the whole picture from a distance (see Hall v Lorimer).   We note too the indicia developed in other cases – the provision of tools, equipment, the undertaking of financial risk; the degree of integration; the provision for holiday, tax, NI, sick pay, notice, and expenses; and the possibility of working for others.

14.	Taking these together we tend to the view that were it not for the risks involved in the provision of the car for his work for Atlas Cars it would be pretty clear that Mr Talbot was employed by Atlas Cars.  (So far as M&R Cars are concerned it seems clear that Mr Talbot was an employee.)  However the financial risks and rewards relating to the provision of his car lead us to the view that, on balance, he was not an employee of Atlas Cars and was not therefore bound by a contract of employment within the meaning of Article 4(4).

Bound by ties creating employment as regards three matters

15.	The second limb of the test in Article 4(4) has been considered by the ECJ in two cases.

16.	In Commission of the European Communities v Kingdom of the Netherlands  C235/85 the court considered the VAT position of Dutch Notaries and Bailiffs.  These functionaries were appointed by the Crown and subject to disciplinary control by the public authorities and to statutory governance in relation to the performance of their services so far as their conditions of work and remuneration were concerned.  The ECJ concluded that they did not fall within Article 4(4); having cited Article 4(4) the court said at paragraph 14:

“Notaries and bailiffs however are not bound to the public authorities as employees since they are not integrated into the public administration.  They carry out their activities on their own account and on their own responsibility; they are free, subject to certain limits imposed by statute, to arrange how they shall perform their work and they themselves receive the emoluments which make up their income.  The fact that they are subject to disciplinary control under the supervision of the public authorities (a situation to be fond in other regulated professions) and the fact that their remuneration is determined by statute are not sufficient grounds for regarding them as persons who are bound by legal ties to an employer within the meaning of Article 4(4).”

17.	We note that the ECJ appear to be considering here the first two matters in the second limb of Article 4(4) namely ‘working conditions’ and remuneration.  In relation to working conditions there are two factors which the court regards as relevant:

(i)	the person’s integration into the “employer’s” organisation,
(ii)	the degree of control exercised over the day to day performance of their work: mere regulation of conduct is not sufficient;

In relation to remuneration the ECJ note as relevant that;

(i)	the notaries and bailiffs themselves receive the remuneration rather than being paid by their “employer”; and
(ii)	the regulation of that remuneration by statute is irrelevant.

18.	In Ayuntamientu de Sevilla v Recaudadores de Tributes las Zonas Primera y Segunda [1993] STC 659 the ECJ considered the VAT position of tax collectors appointed by Spanish local authorities.

19.	Both the Advocate General and the Court considered the operation of each of the three factors in the second limb of Article 4(4).  We now consider those factors and their application to Mr Talbot in turn.

(a)	Working conditions

The Advocate General said:

“With regard to working conditions, the first thing to be determined is whether the worker in question forms part of the employer’s organisation … or whether he is free to organise his activity independently, and to what extent.  The freedom to organise one’s own work independently (to choose colleagues, the structures necessary for the performance of one’s tasks and one’s working hours), in conjunction with the fact of not forming part of the organisation of an undertaking … are characteristic features of an activity which is carried out independently.

“On the other hand while it is part of the [employment relationship] for an employer to be able to give an employee instructions and to have a certain control and disciplinary power over him, those circumstances are not incompatible with an activity which is carried out independently … such as contracts for work.”

The ECJ said:

“With regard … to working conditions, there is no relationship of employer and employee since the tax collectors themselves procure and organise independently … the staff and the equipment and materials necessary for them to carry out their activities.

That being so, the fact that in the performance of their functions tax collectors are tied to the local authority which can give them instructions, and … disciplinary control … are not decisive …”

20.	It seems to us that neither in relation to his engagement with M&R Cars nor in relation to Atlas Cars did Mr Talbot have that degree of independence of action in relation to his working conditions which is indicated in these quotations.

21.	At M&R Cars Mr Talbot worked hours set by M&R, he drove the customers he was told to drive, and drove a car provided by M&R Cars.  He was integrated into M&R’s organisation in that he was not free to organise his activity independently, to choose how or when he worked or with what materials.  He was subject to M&R Cars’ control.  The working conditions were in our view those of employment for the purposes of Article 4(4).

22.	At Atlas Cars, apart from the freedom to use and choose his own car, there was in our view slightly greater integration.  Mr Talbot was not free to organise his activities independently: he had to work set hours, he drove customers allocated to him by Atlas Cars and was not free to drive other persons, he had to agree absences in advance, he used Atlas Cars’ receipts; he had keys to the premises and was required to ferry its staff.  He was subject to Atlas Cars’ control in a manner wholly consistent with employment.  The working conditions were in our view those of employment for the purposes of Article 4(4).

(b)	Remuneration

22.	In Recaudadores de Tributes the Advocate General said:

“With regard to the method of remuneration, the fact that pay (albeit fixed by law) is according to the individual services and is therefore uncertain is clear evidence of an independent employment relationship.  It is obvious that in a relationship of employer and employee, the economic risk can fall only on the employer.  In the present case the tax collector bears the entire economic risk …”

The ECJ said:

“… there is no relationship of employer and employee since the tax collectors bear the economic risk entailed in their activity in so far as their profit depends not only on the amount of taxes collected but also on the expenses incurred on staff and equipment in connection with their activity.”

23.	We also bear in mind the comments in the notaries and bailiffs’ case that remuneration received directly rather than from the employer was evidence of non-employment.

24.	When working for M&R Cars Mr Talbot received the fares directly from the customers and accounted to M&R Cars for half the difference between those fares and the costs of refuelling.  That is a situation markedly different from those of the tax collectors or the bailiffs: the receipt of the fares has little of the beneficial flavour of the receipts in the other cases, and the expenses were not those of Mr Talbot’s choice but were the cost of refuelling M&R Cars’ vehicle.  The economic risk borne by Mr Talbot was that there would be no work to do, not that he would fail to manage his receipts so that they covered his expenses.  It was to us however that this risk was more theoretical than real.  Overall it seems to us that the remuneration was that of an employment relationship and that this feature of Article 4(4) is satisfied.

25.	When working for Atlas Cars Mr Talbot received his remuneration both in the form of payments from Atlas Cars (in respect of the fares paid to Atlas Cars) and in the form of payments made directly to him.

26.	But given that the customers came through Atlas Cars and receipts were made out in Atlas Cars’ name and cheques made payable to Atlas Cars, it seems to us that there is at least some question as to whether such payments as Mr Talbot received directly from customers belonged beneficially to Mr Talbot, Overall it seems to us that the criterion of whether Mr Talbot’s remuneration was received from his employer rather than directly points towards employment.

27.	But in comparison to the M&R Cars position Mr Talbot did take more economic risk when working for Atlas Cars: he took economic risk in relation to the difference between the fares and his costs (of the radio rental and car maintenance and running). The Advocate General, in the quotation above from Recaudadores, regarded economic risk in an employment relationship as being the province only of the employer, but the Court’s formulation is less categorical; and it seems to us that there may be a spectrum at one end of which smaller economic risk may be borne by an employee (such as the costs and depreciation of a building labourer’s own boots, clothes and tools) and, at the other, when such risk is inimical to employment (as in the case of the tax collectors).  In evaluating where along that spectrum employment conditions became independent conditions, there is a need-reflected in the ECJ’s judgment - to have regard to the concept of independence: in focusing on profit and in particular on the expenses incurred on staff and equipment, the ECJ’s judgment brings to mind that the expenditure on those items is something within the independent control of the taxpayer.  By contrast with the labourer’s boots and tools, the tax collectors had greater independence to choose the level and nature of their expense and to determine their economic risk.

28.	In Mr Talbot’s case his ability to control his expenses was limited: little could reasonably be done to mitigate fuel or running costs and the cost of his radio rental was fixed.  That places him some way from the tax collectors on the spectrum.

29.	On balance however we believe that the economic risk he took is less consistent with the relationship of employer and employee.

(c)	Employer’s liability

30.	In Recaudadores da Tributas, the Advocate General said:

“I now come finally to the issue of liability.  In the present case a distinction must be made between the liability arising as a result of the tax collector’s own conduct and a liability arising from taxation, that is to say relating to the appropriateness of the tax.  It is clear that the tax collector may be held liable only for the former and that, therefore, it must be determined on the basis of the applicable national legislation, whether the worker is liable vis-à-vis third parties for his own acts and conduct.”

31.	The last sentence of this passage is difficult to transpose into English law where the employed status of a tortfeassor will not protect him from liability for his conduct although it may also result in his employer being liable as well.  It appears that by contrast the Advocate General envisages liability resting either with “employer” or with “employee”, but never both.

32.	In its judgment the ECJ did not address the issue in the same way:

“With regard, firstly, to employer’s liability, the fact that the Commune [which engaged the tax collector] can be held liable for the conduct of the tax collectors when they act as representatives of the public authority is not sufficient to establish the existence of a relationship of employer and employee.

“The decisive criterion for this purpose is the liability arising from the contractual relationships entered into by the tax collectors in the course of their activity and their liability for any damage caused to third parties when they are not acting as representatives of the public authority.”

33.	Given that the ECJ were dealing with the factors in Article 4(4) which were potential components of an employment relationship, the court cannot have been addressing in the first paragraph above whether or not liability of the employer was a sufficient condition for the existence of employment – as at first sight its language suggests.

34.	It seems to us that in those two paragraphs the court is directing attention to the whole of the economic activity carried on by the tax collectors and asking whether, and in respect of which aspects of that activity, the “employer” is liable for the employee’s actions.  If that is right then the test being applied is different from that apparently advocated by the Advocate General.

35.	The proper approach in our view is to consider the extent of the “employer’s” liability for all acts of the “employee” in the course of the activities for which he is engaged and to determine whether these liabilities are those which one would expect to arise in an employment relationship in which the employer will generally be liable.

36.	The Respondents note, and we agree, that the ECJ have approached employer’s liability as relating to the employer’s liability for acts of the employee rather than in respect of liability of the employer to the employee e.g. for injuries sustained in his engagement.

37.	Mr Ruck Keene suggests that the question of whether A is liable for B’s actions is a circular one in an English domestic VAT context because it is only if A is B’s employee that such a (vicarious) liability will arise, and if A is B’s employer the relationship will necessarily satisfy this criterion.

38.	Mr Ruck Keene drew our attention to Rogers v Night Riders (1983) RTR 324 in which the Court of Appeal held that a minicab booking agency was liable for an injury caused by an improperly maintained minicab owned and operated by an independent owner driver.  He notes however that the liability of the agency was not based on vicarious liability, but upon the primary liability of the agency for breach of a duty owned to the passenger to provide her with a properly maintained car.  He says therefore that it does not take matters further forward.

39.	But it seems to us that in determining whether or not a condition of EU wide application is satisfied, what is relevant is not the source or explanation for an “employer’s” domestic liability, but whether or not it exists.  If it exists then it can be relevant to whether or not the relationship of employer and employee is present as respects employer’s liability.

40.	So far as concerns Atlas Cars’ liability to a passenger as respects the performance of the journey or incidents in the course of the journey it seems to us that Atlas Cars would be liable; the passenger, as Everleigh LJ says of the customer in Rogers v Night Riders, would be unlikely to regard Atlas Cars as “simply a kind of post box to put her in touch with someone with whom she would make an independent contract … the defendant undertook to provide a car to take the plaintiff to her destination”, and would be liable for the failures in the performance of that contract.

41.	But, because Mr Talbot was not an employee of Atlas Cars, Atlas Cars’ liability in English law would not extend to liability to third parties injured by the negligent driving of Mr Talbot (section 63 Town Police Clauses Act 1863 does not apply because the cars are not Hackney Carriages).  And, even though Mr Talbot’s car bears Atlas Cars’ logo in a prominent position, we cannot see how that feature would be sufficient to underpin an action by the third party against Atlas.  Neither, it seems to us, would Atlas Cars’ liability extend to pay the garage repair bill for Mr Talbot’s car if he failed to pay it such a liability might arise by reason of an agency outside employment, but there was no evidence that Mr Talbot was an agent for Atlas cars..

42.	Those latter liabilities are both significant, and liabilities which, at least to a domestic lawyer one would expect to find visited on the “employer”.

43.	We therefore conclude that overall the arrangement did not create the relationship of employer and employee as regards Atlas Cars’ liability.

44.	As regards M&R Cars however, the position is different.  The only potential liability in respect of which there is any doubt is liability for negligent driving to a third party: in all other areas of material potential liability M&R Cars would have been liable.  Given our conclusion that for domestic law purposes Mr Talbot was employed any doubt as to third party liability is small.  We therefore conclude that the liability condition is not satisfied in the case of M&R Cars.

Summary and conclusion on Article 4(4) second limb

45.	It is possible to read the second limb of Article 4(4) as creating a three pronged condition (working conditions, remuneration, employer’s liability) so that the failure of any prong caused the taxpayer to be independent.  That seem to have been the approach of the ECJ n Aguntamiento, but it is less clear in Recaudadores.  On that basis the failure of the employer’s liability prong means that Mr Talbot is not to be regarded as acting independently when working for Atlas Cars.

46.	It is also possible however to regard the words as imposing a single composite test – as to whether there is an employment relationship – as regards – or by reference only to the weighing up of the three prongs.  If that is the test then we have more hesitation in finding that the Appellant was independent, but on balance do so find: the omissions in the extent of Atlas’ liability, and the common risk bore by Mr Talbot  weigh sufficiently heavily to conclude that he was acting independently.

47.	On each approach we regard Mr Talbot as not being independent when he was engaged by M&R Cars.

Radio Rental Costs

48.	We have noted at 5(10)(iii) above that Mr Talbot had an Atlas Cars radio for which he would pay a weekly rental.  We also note at 5(10)(xviii) that Mr Talbot’s retention (or payment from Atlas Cars) was determined after deducting the radio rental.

49.	In the periods after 1 November 2005 Atlas Cars was VAT registered and HMRC’s assessments on Mr Talbot thereafter allow input tax credit for the VAT on the radio rental.  Before that time no credit was given.

50.	In correspondence with HMRC (an e-mail of 26 October 2006) Mr Talbot argues that he receives a net daily payment for the services he renders to Atlas Cars rather than a gross payment from which a deduction is made for the supply by Atlas Cars of the radio.  If that is the proper analysis then Mr Talbot’s output VAT for the whole of the relevant periods should be calculated by reference to the net receipt rather than the gross amount.  Effectively this would yield the same result as if Atlas Cars had been VAT registered for the whole period and input tax credit had therefore been available in respect of the radio rental costs.

51.	The issue for us is therefore whether there is a separate supply of the radio service by Atlas Cars to Mr Talbot together with a supply of services by Mr Talbot to Atlas Cars or whether there is only a supply of driving services by Mr Talbot for a reduced consideration.

52.	It seems to us quite possible that the arrangements under which a driver drove for a private hire or taxi firm could be such that there was no VATable supply of a radio to the driver.  In the same way where a driver drives the firm’s car it may well be the case that there is no VAT supply of the use of the car by the firm to the driver.

53.	The critical factor is whether consideration is attributable to the provision of the radio.  If there is no consideration then although something is supplied there can be no VATable supply.  The question is therefore whether there was consideration of a monetary value given for the provision of the radio.

54.	In our view in this case the ‘rent’ payable for the radio was consideration for its provision.  We heard no evidence which bore directly on the question of whether or not rental payments had to be made even if the fares earned did not cover the rental but the fact that the right to take a holiday was described as a “rent free” holiday led us to conclude that the rental was payable even where there were no fares earned.  That leads us to the conclusion that there was separate consideration for the supply of the radio.

55.	In turn that leads us to the conclusion that the deduction of the radio rental from the payments retained by Mr Talbot was not a reduction in the amount to which he was entitled but a deduction from it.  We therefore find that Mr Talbot’s output tax is determinable by reference to the gross amount.  The assessment was on that basis and to that extent we dismiss any appeal against it.

Conclusion

56.	We find that Mr Talbot was not providing his driving services in partnership with his wife but as an individual.

57.	We find that as respects the period of Mr Talbot’s engagement with M&R Cars he was not acting independently and so was not in respect of the services he provided liable to account for VAT.

58.	We find that as respect the period of Mr Talbot’s engagement with Atlas Cars, he was acting in an independent capacity and, sadly, liable to account for VAT.

59.	We therefore allow the appeal to the extent only of the assessment in respect of the period ending 31 January 2004.

60.	This is an unfortunate result for Mr Talbot.  Had his VAT registration been cancelled before he started driving he would have had no VAT liability: he would not have been registrable because his supplies fell below the threshold.  We wondered, without holding out any hope, whether, were he to deliver VAT invoices to Atlas Cars, Atlas Cars might be able to recover some of the VAT in the period since 1 November 2005 when it was VAT registered and make some additional payment to Mr Talbot in respect of the services he had rendered.  With goodwill, the right circumstances and HMRC’s customary co-operation something might be salvaged.

61.	Our decision was unanimous.  No costs were sought and we make no award thereof.

CHARLES HELLIER
CHAIRMAN

RELEASED: 1 May 2008

LON 2007/0243