MyPay Limited v The Commissioners for HMRC

This is an application by the appellant (“Mypay”) to amend its grounds of appeal (“the Application”). The Application was made following a decision of the First-tier Tribunal (“the FTT”) (Judge Popplewell) released on 11 October 2022. That decision sets out the circumstances in which the Application came to be made.

Mypay contracts with workers who provide their services to end clients in various sectors including healthcare, IT and engineering, both public sector and private sector organisations. The worker obtains an engagement with the end client through an employment agency. At the same time the worker enters into a contract with Mypay. The contract between the worker and Mypay is described as “Statement of Main Terms and Conditions of Employment” (“the Contract”).

At all material times and for many years, Mypay has treated itself as the workers’ employer. It receives payment from the employment agencies in relation to the services of workers and then makes payment to the workers, deducting PAYE and national insurance.

The appeal concerns determinations under regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 and a decision charging national insurance under the Social Security Contributions (Transfer of Functions) Act 1999. The determinations charge tax of £286,556 and £330,381 for tax years 2014-15 and 2015-16 respectively. The decision charges national insurance of £1,692 in respect of both those tax years but relates to only one worker. I understand it is a test case in relation to other workers where the national insurance chargeable is £795,848. I understand that the total amount in issue in the appeal is approximately £1.4m.

Mypay lodged appeals with the FTT against the determinations and the decision in August 2019 and September 2020. Those appeals were lodged in time. They acknowledge that the workers were employees of Mypay. The first appeal was stayed for a period of time behind the appeal of another taxpayer. HMRC served a statement of case covering both appeals on 3 March 2021. There had been some delay on the part of HMRC prior to service of their statement of case.

Mypay applied to HMRC for alternative dispute resolution in May 2021, but HMRC did not accept the dispute for ADR. Thereafter, neither party took steps to progress the appeal.

In October 2021, Mypay appointed Jurit LLP to act for it in the appeals, in place of its previous representative. In November 2021, Jurit indicated that they were minded to make an application to amend the grounds of appeal. What happened then is set out in the decision of Judge Popplewell which I shall not repeat here. Briefly, the Tribunal made a direction on 18 February 2022 granting the appellant permission to amend its grounds of appeal in accordance with a draft sent to the Tribunal on 24 January 2022. It did so on the mistaken assumption that the amendment had been agreed by the parties. In fact, the parties were not in agreement as to the most significant aspect of that amendment and on 11 October 2022 Judge Popplewell set aside the direction which had given Mypay permission to amend its grounds of appeal. He gave the appellant permission to make an application to amend its grounds of appeal and that led to the present Application which was made on 25 October 2022.

During the relevant tax years, Mypay had accounted for PAYE and national insurance on payments made to workers. It also made tax free payments to some workers in relation to travelling expenses incurred in travelling from home to their places of work. This was on the basis that the contract between Mypay and each worker was an overarching contract of employment which covered periods during which a worker was working on assignments for an end-client as well as periods between assignments. Mypay considered that the location of each assignment was not a permanent workplace for the purposes of section 338 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and expenses of the workers in travelling from home to the workplace were not ordinary commuting. A deduction from earnings would therefore be permitted for such payments in relation to both income tax and national insurance.

The determinations and decision under appeal were made by HMRC on the basis that there was no overarching contract of employment. HMRC considered that there were separate contracts of employment between Mypay and the workers in relation to each assignment, but not in relation to the periods between assignments. The workplaces were therefore permanent workplaces and payment of the workers’ travelling expenses to those workplaces amounted to earnings. In reaching that conclusion HMRC relied on the Upper Tribunal decision in Reed Employment plc v HMRC [2014] UKUT 0160 (TCC).

Reed Employment concerned tax on travelling expenses of agency workers. One of the issues in the Upper Tribunal was whether there was an overarching contract of employment covering all assignments or a series of contracts of employment covering each individual assignment. The Upper Tribunal held that there was no mutuality of obligation in the gap periods and therefore no overarching contract of employment. The case went to the Court of Appeal, but not on that issue.

The issues between the parties on these appeals are described in the following terms in HMRC’s statement of case at [24] and [25]:

At the time HMRC served its statement of case this was a fair reflection of the issue between the parties.

Mypay says that HMRC’s statement of case goes on to raise contradictory arguments at [33] to [44]. Those paragraphs appear under a heading “relevant cases” which includes various well-known authorities setting out the requirements for a contract of employment. There is also reference to Reed Employment. At [33], the statement of case refers to dicta of Lord Clarke JSC in Autoclenz v Belcher [2011] UKSC 41:

For present purposes, it is also relevant to note that Lord Clarke approved what had been said by Smith LJ in the Court of Appeal at [53]:

HMRC’s statement of case sets out Mypay’s grounds of appeal at [39] to the effect that there was mutuality of obligation during the periods between each assignment and a single, overarching contract of employment. It sets out HMRC’s case at [40] – [49], where it is relevant to note the following passages:

In these paragraphs, HMRC rely on what is described as the “Autoclenz approach” to construing employment contracts. The facts and matters relied on by HMRC at [43] to establish that there was no overarching contract of employment include various facts and matters, some which are said to be contrary to the express terms of the Contract. There are 15 facts and matters relied on by HMRC as follows:

Ms Murray on behalf of Mypay says that it is clear from the citation of Autoclenz in the statement of case that HMRC are arguing that certain terms of the Contract should be disregarded because they conflict with the reality of the relationship between Mypay and the workers. HMRC’s pleaded case is that the reality of the relationship is inconsistent with an overarching contract of employment. However, at the time of the determinations and decision under appeal there had been no reference to Autoclenz.

Mypay wishes to amend its grounds of appeal to ensure that if the FTT were to agree with HMRC about the reality of the relationship, then Mypay is not precluded from arguing that the reality of the relationship is that there was no employment contract at all between Mypay and the workers. This is described as Mypay’s “Additional Ground” and it is intended to be in the alternative to its primary ground that there was an overarching contract of employment. Mypay’s case is that if it is appropriate to apply Autoclenz, then various terms of the contract must be disregarded. The Additional Ground is stated as follows in a schedule to the Application:

Mypay’s amendment may be viewed as reactive rather than proactive in the sense that its primary ground is that HMRC’s case is wrong in law because it applies the approach in Autoclenz. Mypay says that if that approach is permissible, then its application to periods when workers were engaged on assignments leads to a conclusion that there were no contracts of employment at all.

If the Autoclenz approach has any application, Mypay contends in its Additional Ground that the following clauses of the Contract should be disregarded for the reasons given:

I should note that Mypay has also used the Application to re-state its existing grounds of appeal. It was not intended by Judge Popplewell that the Application would deal with anything other than the Additional Ground of appeal. The arguments before me focussed on the Additional Ground of appeal. I pay no regard to the way in which Mypay has sought to re-state its existing grounds of appeal.

It is common ground that the Application should be determined applying the approach described by Carr J (as she then was) in Quah v Goldman Sachs International [2015] EWHC 759 (Comm):

In Kawasaki Kisen Kaisha Ltd v James Kemball Ltd [2021] EWCA Civ 33 the Court of Appeal summarised the ‘merits test’ to be applied at [17]-[18]:

I consider the relevant factors below. In brief, Mypay says that the Application is not very late. Mypay has acted promptly and has not caused any delay in the proceedings. The Additional Ground has a reasonable prospect of success, and it is simply an alternative argument based on HMRC’s currently pleaded case. Mypay’s primary argument is that the Contract is an overarching contract of employment. The Additional Ground does not involve relying on contradictory evidence. The merits of the Additional Ground cannot be determined at this stage because the reality of the relationship is a question of fact, and the parties have not yet served lists of documents or witness statements. Mypay says that the prejudice to Mypay if it is not permitted to amend its grounds of appeal would outweigh any prejudice to HMRC if permission is granted.

In summary, HMRC say by way of opposition to the Application that the Additional Ground of appeal lacks any real prospect of success. It contradicts Mypay’s primary ground of appeal that there is an overarching contract of employment. HMRC say that there has been no proper explanation as to why the Additional Ground has been raised so late.

For the purposes of the Application, Mypay relies on two witness statements of Mr Stephen Hollins, dated 25 October 2022 and 11 May 2023. Mr Hollins is the managing director and shareholder of Mypay.

In his first witness statement, served with the Application, Mr Hollins outlines the business of Mypay, emphasising that it is not a tax avoidance scheme. He describes the fact that Mypay’s operations included the reimbursement of travel and subsistence expenses to workers until a change in the law in April 2016. Since then, the business has grown substantially and he cited certain advantages to workers “engaged by Mypay” including “continuity of employment” when working on multiple assignments for one organisation. Mypay receives payment from the end-client or an employment agency and processes the payment to the worker after retaining its agreed margin.

Mr Hollins second witness statement was said to have been served in order to evidence the relationship between Mypay and the workers, and in order to enable the tribunal to assess whether it was an employment relationship. It was also said to respond to various factual matters raised by HMRC in their reply to the Application.

Between November 2022 and April 2023, Mr Hollins invited a sample of workers to complete an online questionnaire. He told the workers that Mypay wanted the information to “help with an audit”, and not that he intended to present their replies to the tribunal. Otherwise, he thought that workers might not want to co-operate and he did not want the true reason to influence their answers. The results of the questionnaire suggest, I put it no higher, that most workers felt that they were supervised by the end-client and did not consider Mypay to be their employer.

HMRC take issue with some of the assertions made by Mr Hollins in his witness statements, but it is not appropriate for me to determine any factual issues on this Application. HMRC also objected to the second witness statement being admitted in evidence because it had been served late in the day without any explanation as to why it was being served late. It was only served on 26 May 2023, a month or so before the hearing.

In the event, Ms Murray did not rely to any great extent on the material in Mr Hollins second witness statement. In my view the statement does not take Mypay’s submissions in support of the Application any further.

It is important to note at this stage that the proposed amendment is not a “very late amendment” in the sense described in Quah. Indeed, the present proceedings have not progressed beyond HMRC’s statement of case. It does however remain a late application. It was raised after Jurit had been instructed and Jurit considered it might amount to an arguable ground of appeal.

HMRC say that the Additional Ground lacks any real prospect of success. Mr Tolley KC on behalf of HMRC adopted phrases from the authorities, and submitted that the Additional Ground is inherently implausible, self-contradictory, not supported by contemporaneous documentation, lacks any degree of conviction, is not coherently particularised and lacks any factual basis. By self-contradictory, he meant that the Additional Ground is inconsistent with Mypay’s primary case that there is an overarching contract of employment.

Mr Tolley also sought to argue that Mypay was subject to an estoppel by convention which should prevent it from relying on the Additional Ground (See HM Revenue & Customs v Tinkler [2021] UKSC 39 at [45] to [53]) . If Mypay were to lose on its primary argument and fail to establish an overall contract of employment, then I understand that HMRC would assert that there was an estoppel by convention whereby Mypay would be estopped from asserting that there was no contract of employment at all.

Essentially, Mr Tolley submitted that Mypay and HMRC expressly shared a common assumption that Mypay employed the workers during the periods of assignments. Mypay was responsible for that common assumption. HMRC progressed the enquiries on that basis and issued the determinations and the decision. They are now out of time to collect tax and national insurance from the workers or from the true employers.

Estoppel by convention was first canvassed in HMRC’s skeleton argument and Ms Murray did not consider that she had had a reasonable opportunity to respond to it. In any event, I cannot say at this stage what strength HMRC’s argument on estoppel by convention might have. It does not in my view add anything to HMRC’s objection to the Application.

It is true that Mypay’s Additional Ground of appeal is inconsistent with its primary ground of appeal that it had an overarching contract of employment with the workers. However, there is nothing wrong in principle with an appellant maintaining a primary ground of appeal, whilst at the same time having an alternative argument if the primary ground of appeal is not successful. Indeed, in some circumstances HMRC will make an assessment to tax on one basis, whilst making an alternative assessment on a different basis, without prejudice to their case that the first assessment is valid.

HMRC say that the FTT would have to consider two contradictory cases being advanced by Mypay at the same time. It is said that there is no explanation of how the FTT should treat Mypay’s formal assertions that it employed the workers or the fact that it has deducted PAYE and national insurance contributions as an employer, when in the alternative it submits that it did not employ the workers.

I can see that difficulties that might arise for Mypay in putting forward its appeal on these alternative bases. The burden will be on Mypay to establish that there were overarching contracts of employment. If it fails to meet that burden, there would be a burden on Mypay to establish in the alternative that there were no contracts of employment at all. It is not clear how Mypay would intend to present its case walking that tightrope. The stronger its argument that there was an overarching contract of employment, the weaker its argument that there was no contract of employment at all.

It was not a submission before me, but I note that Judge Popplewell records a submission of Ms Murray in the application before him at [23(5)] as follows:

Ms Murray’s submission to Judge Popplewell might suggest that the appropriate time for an application to amend to introduce the Additional Ground would be once lists of documents and witness statements had been served. However, it was not suggested before me that the timing of the Application was an issue, in the sense that it was being made too early. Quite the opposite, the submission from HMRC was that it was being made late in the day. However, there is no reason why Mypay should not have collated, sifted and considered the evidence relevant to the Additional Ground for the purposes of the Application.

I can deal with the question of the timing of the Application at this stage. Mr Tolley submitted that Mypay has not given any explanation for the delay between lodging its notice of appeal in August 2019 and its proposed change of case in January 2022. Whilst Jurit was appointed in October 2021, Mypay has never revealed when the Additional Ground was first identified. Subject to questions of prejudice which I consider below, I do not consider that the timing of the Application weighs heavily in the balance. The proceedings themselves have not got beyond HMRC’s statement of case.

I was referred to a very similar application before the FTT in IPS Umbrella Ltd v HMRC [2022] UKFTT 00081 (TC). The pleadings and contractual arrangements in that case were almost identical to the present case. The appellant sought permission to amend its grounds of appeal to assert that it was never in reality an employer at all. The amendment in that case appears to have been intended as a replacement ground of appeal rather than as an alternative to the primary ground as in the present appeals. In that case, the FTT refused permission to amend because the application was made late in the day and was contrary to the contemporaneous documentation.

The weight to be given to the lateness of an application must be judged by reference to the particular facts of the case. The FTT in IPS Umbrella was also faced with a different application, in that it was to replace a ground of appeal rather than to rely on an alternative ground of appeal. The decision does not really assist me on the present application.

At the heart of the Application is the position of the parties in relation to Autoclenz and the Autoclenz approach. Ms Murray pointed out that in HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501, the Court of Appeal made clear at [156] that Autoclenz has no application in the context of identifying whether there is a contract of employment for tax purposes, in that case the intermediaries’ legislation in IR35. That much is common ground.

Ms Murray stated that Mypay’s proposed amendment follows from HMRC’s reliance on Autoclenz, which was first raised in their statement of case in March 2021. In oral submissions she acknowledged that the Additional Ground only arises if it is legitimate to apply the Autoclenz approach in determining whether the Contract is an overarching contract of employment.

HMRC, in their reply to the Application, stated as follows in relation to reliance on Autoclenz:

Ms Murray criticised HMRC for taking that position and suggested that they should have applied to amend their statement of case. She submitted that Mypay was entitled to view the statement of case in its unamended form as setting out the case Mypay has to meet. Hence, Mypay was entitled to rely on the Additional Ground because Autoclenz was still in play. If HMRC had amended their statement of case then the Additional Ground would have been rendered otiose.

I can see why HMRC took the approach of not seeking to amend its grounds of appeal whilst the Application was outstanding. Depending on the outcome of the Application, a further amendment to the statement of case might have been necessary. Instead, HMRC alerted the appellant and the Tribunal to the fact that it was no longer relying on Autoclenz.

Initially, I considered that HMRC’s approach was sufficient in the circumstances. On reflection, I was concerned that there was a potential for further dispute following this decision when HMRC came to formally amend their statement of case. I therefore directed HMRC to provide a draft of their proposed amended statement of case, gave Mypay the opportunity to make any relevant submissions and gave HMRC an opportunity to respond to those submissions.

HMRC’s case is that whilst they are no longer relying on Autoclenz, they do maintain that the contracts must be construed by reference to a “realistic and worldly-wise examination of the relevant contracts and the surrounding circumstances, including post-contractual circumstances”. Their new case is summarised at [37] and [38] of the draft amended statement of case:

In light of the fact that HMRC no longer rely on Autoclenz, it might have been expected that the rationale for the Application would fall away. Mypay’s position was that the Additional Ground was being raised because HMRC were relying on Autoclenz. However, Mypay’s response to the proposed amendments was that HMRC were not, as had been suggested, relying on ordinary principles of contractual construction. They were relying on the approach in Kalwak which was approved by the Supreme Court in Autoclenz but which was rejected by the Court of Appeal in Atholl House in the context of tax. Mypay therefore submits that the position is the same. If the FTT is entitled to “set aside” the terms of the contract because they do not reflect reality, then that approach must support Mypay’s argument on the Additional Ground that there were no contracts of employment at all.

It is necessary to consider the decision of the Court of Appeal in Atholl House in more detail. The FTT had found that applying the reasoning in Autoclenz, certain clauses in the written contract did not reflect the true agreement between the parties and should therefore be ignored. The Upper Tribunal held that in applying the Autoclenz approach, the FTT had failed properly to consider whether the written terms were unrealistic.

The Court of Appeal at [153] to [155] referred to the Supreme Court decision in Uber BV v Aslam [2021] UKSC 5 which had considered the decision in Autoclenz:

The Court of Appeal then concluded at [156] and [157] that the Autoclenz approach was not applicable in the context of determining whether an individual would be an employee for the purposes of the intermediaries’ legislation and the Upper Tribunal had been entitled to reject the FTT’s application of Autoclenz:

The Court of Appeal went on to consider whether the Upper Tribunal had been entitled to find that the FTT had erred on the issue:

HMRC appear to argue on the basis of [159] that whilst the Autoclenz approach is not appropriate, the contract should still be construed by reference to a realistic and worldly-wise examination of the relevant contracts and the surrounding circumstances, including post-contractual circumstances. Whilst I have not heard full argument on this point, I am not sure it is right. It appears to me that at [159] the Court of Appeal was describing why, even if Autoclenz did apply, the FTT had gone wrong. I do accept, however, that ordinary principles of contractual construction would involve the application of business common-sense, which is the point made at [39] of HMRC’s draft amended statement of case.

It is clear from Atholl House that neither party can rely on the Autoclenz approach. HMRC now say that they rely only on the conventional approach to contractual interpretation, although they say that such an approach includes the principles outlined in Kalwak. Whether or not that is correct is, in my view, best determined on the basis of full argument at the substantive hearing of the appeal.

Be that as it may, it was always open to Mypay to raise the Additional Ground, if it considered it had merit. There is no reason that Mypay’s position should depend on how HMRC put their case. There is no reason Mypay should not have relied on ordinary principles of contractual construction to argue that there were no contracts of employment at all if it was considered such arguments had merit.

Without trespassing on the merits of the existing ground of appeal, in my view the language used in the Contract is consistent only with the existence of an overarching contract of employment or separate contracts of employment covering each assignment.

The Contract defines Mypay as the employer. The document itself is headed “Statement of Main Terms and Conditions of Employment”. It includes numerous provisions drafted on the basis that the worker is an employee and Mypay is the employer. For example, there are clauses dealing with commencement and termination of the employment, that the worker will report to Mr Hollins, the place of work, and the hours of work. The employer will notify the worker where they are required to work and guarantees a minimum of 336 hours work per year. The wage was to be agreed between the worker and the employer. The employer agreed to endeavour to provide the worker with work.

Throughout the relevant tax years, Mypay operated a PAYE scheme and deducted tax and national insurance from payments made to workers. In all the correspondence between Mypay and HMRC in connection with HMRC’s enquiry, Mypay’s representative acknowledged and asserted that Mypay was the employer of workers during periods where there were assignments and in the periods between assignments. The original grounds of appeal for each appeal and the documents relied on by Mypay contain numerous references to the workers being employees and Mypay being the employer.

It is notable that Mr Hollins in his first witness statement does not say clearly what the Contract was for if it was not a contract of employment at all. Mypay retained an agreed margin from payments made by the agencies and treated the balance as earnings of the workers. The Application does not contain any analysis of what the payments represented if Mypay did not employ the workers. Indeed, Mr Hollins in his first witness statement continues to refer to the workers as employees, without identifying who the employer was or the nature of its contractual arrangements with the employer.

In the circumstances, I am not satisfied that Mypay’s argument that there were no contracts of employment at all has any real prospect of success. It certainly does not have a sufficient degree of conviction to justify granting permission to amend the grounds of appeal. On that basis, I must refuse the Application.

If I were satisfied that there was merit in Mypay’s Additional Ground, I would have a discretion whether to permit an amendment to its grounds of appeal. In exercising that discretion I must consider all the circumstances including any prejudice to the parties. Clearly there would be prejudice to Mypay if the Additional Ground had some merit and Mypay was not permitted to amend its grounds of appeal.

HMRC also say that if Mypay were to lose on the primary ground of appeal but succeed on the Additional Ground, then they would be prejudiced. They could not now seek to recover additional tax from the workers, or from whichever legal entity was liable to account for PAYE and national insurance.

It was not disputed that HMRC would ordinarily be subject to a 4 year time limit from the end of the relevant tax year to seek to make determinations and decisions charging tax and national insurance. Further, that time limit would be extended to 6 years in the case of carelessness by workers or the entities liable to account for tax and national insurance. The appeals concern tax years 2014-15 and 2015-16 and HMRC could have issued determinations and decisions relying on carelessness at the time the appeals were lodged. On any view, HMRC could not now issue determinations or decisions for 2014-15. In theory, HMRC would have been in time for 2015-16 if there was carelessness. They had between January 2022, when the possibility of an application was first raised, and April 2022 to make alternative determinations and decisions. I am satisfied that did not give a realistic window to conduct enquiries as to who might be liable for the tax and national insurance and to issue appropriate determinations and decisions. HMRC were deprived of that opportunity which they would have had if Mypay had raised the Additional Ground in 2019 when the first appeal was lodged.

Taking into account all the circumstances, I would have refused permission to amend even if the Additional Ground had any merit.

For the reasons given above, I refuse Mypay’s application to amend its grounds of appeal to rely on the Additional Ground.

It is appropriate for me to make further directions to progress the appeals. I note that Mypay seeks to rely on two further amendments to its grounds of appeal and HMRC do not oppose those amendments. I therefore direct as follows:

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. 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.