When is an employee not an employee?

Posted by RM2 at 17:01 on 29 May 2015


Employee share plans and entrepreneurs' relief will often require you to be certain whether someone is actually an employee, director of officer of the company (for example if a share is an employment related security so the acquisition (even if for full value) has to be notified to HMRC).

Don't assume, simply because there is no obvious employment contract, the individual is in fact not an employee.
A recent case at the First Tier Tribunal looked at whether an individual, Mr Hirst, was a director or an employee of a company, Wyse Finance Limited. This was to ascertain whether Mr Hirst was eligible for entrepreneurs' relief on the sale of shares in the Company.

HMRC had disallowed entrepreneurs' relief on the grounds that Mr Hirst was neither a director nor an employee for the 12 months prior to the sale of the shares in July 2009.

On the face of it, HMRC's view seemed quite reasonable:

  • Mr Hirst had resigned from his position as business development director in December 2007, in an attempt to control costs.
  • In 2008, Mr Hirst was convicted of a criminal offence and so was obliged to terminate his directorship with the Company.
  • Throughout this period, Mr Hirst continued to work closely with the Company, including sourcing new business and developing a close relationship with a particular business which presented good opportunities for the Company. However, he received no salary for this but was paid on a commission only basis.
  • In fact, Mr Hirst never actually claimed any commission payments, relying on dividends from his shareholding (although he did have a phone and a laptop that had belonged to the Company, and the Company paid his home internet costs).

The Tribunal concluded that Mr Hirst was not a director (whether actual, shadow or de facto). However, it also concluded that he was an employee during the relevant 12 month period.

This was because, amongst other things:

  • Although he did not claim commission, he was entitled to it. He was thus receiving consideration in return for the provision of his skills, as well as additional consideration from the provision of the laptop, phone and internet costs.
  • He reported to the Company and was thus under its control.
  • None of the other facts reported were "inconsistent with there being an employment relationship".

What do you think? Do you think the Tribunal was correct in this view? We do not know if HMRC will appeal against this decision but you know that RM2 will always try to keep you up to date with what is happening in the share scheme world.