Mr J's complaint about HM Revenue & Customs and the Adjudicator's Office
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HM Revenue & Customs’ failure to ask Mr J questions at the right time put him in a difficult position which led to the breakdown of a long-standing business relationship, causing him financial loss and a great deal of worry, distress and inconvenience.
Background
Mr J was engaged at a hotel as a general handyman, on a self-employed basis. In 2003 HM Revenue & Customs (HMRC) carried out an employer compliance review at the hotel; they considered that Mr J was an employee, basing their opinion on information from the hotel’s proprietor. Mr J declined HMRC’s invitations to meet with them, but he did submit written answers to their questions. Unfortunately, the hotel was sold before Mr J’s status was resolved. HMRC wrote to him in February 2005 reiterating their opinion that he was an employee, and saying that he should give the new owners a copy of their opinion. Mr J said he did not receive this letter. HMRC carried out another employer compliance review in October, and again determined that Mr J was an employee. They did not contact Mr J, basing their decision on the information he had provided in 2003 and on information from the new owners.
In February 2006 HMRC wrote to tell Mr J that he should be treated as an employee and explained their reasoning for this. They did not invite him to provide any additional information if he disagreed with their determination, nor did they tell him he could ask for a formal decision against which he could appeal. Mr J wrote back, explaining in detail why he considered himself to be self-employed. HMRC replied, saying that it appeared that he had continued to work under the same terms and conditions as before and that he should be treated as an employee. They did not address most of the points in Mr J’s letter.
Mr J continued to work on a self-employed basis until April 2006, when he resigned after the owners insisted he became an employee. He asked HMRC to reconsider their decision, which he said had caused him financial hardship. HMRC replied, reiterating their position and inviting Mr J to complain if he remained unhappy. In response to an approach from Mr J’s Member of Parliament, HMRC acknowledged that they had not asked Mr J for any information before making their decision, and said that they should give him the opportunity to tell them of any changes in the working practices between the hotel owners which might affect their opinion. Accordingly, HMRC invited Mr J to meet their inspector, and said that the hotel owners could treat him as self-employed until the matter was resolved.
The hotel was sold again in May 2006. Mr J felt unable to approach the new owners for work because of his dispute with HMRC, and HMRC’s offer to continue treating him as self-employed had come too late, because he had already resigned. Mr J met the inspector in June and provided detailed information about his engagement at the hotel and his business generally. In July HMRC accepted that Mr J was self-employed.
In August 2006 Mr J asked HMRC to compensate him for the losses (£2,000), costs (£1,400), worry and distress he said he had incurred because of their actions. He said that he had had to terminate his contract at the hotel, through no fault of his own, leaving him short of income. He had unpaid bills and had incurred penalty charges and court fees. He also wanted the stress and trauma caused to him and his wife taken into account. HMRC asked for more information about Mr J’s claim for costs, which he provided. They wrote again in October, accepting that they should have asked him for a meeting before deciding his status, and apologising for their mistake. HMRC said it seemed that because he did not wish to meet with an officer in 2003 they had assumed he would also refuse subsequent requests. HMRC rejected Mr J’s claim for compensation, but offered him £25 for the delay in responding to his complaint. Mr J then complained to the Adjudicator’s Office.
In his letters to the Adjudicator, Mr J said ‘I still see this as a result of an HMRC investigation resulting in me having to terminate my main contract leaving me such a shortfall with very little hope of making it up in the short or long term’. He said also that the stress he had been under while dealing with his creditors had ‘…played havoc with my health and well being and at times I was very short-tempered and depressed, I would be seeking reasonable compensation for this traumatic period’. The Adjudicator’s Office partly upheld Mr J’s complaint, finding that HMRC had provided a poor service and that their failure to adhere to their guidance had caused him worry and distress. They recommended that HMRC pay him £50, plus £10 towards his communication costs, and endorsed their offer of £25 for the delay in dealing with his complaint. The Adjudicator declined to recommend anything for Mr J’s costs and losses, because he had not provided evidence to show how they had been incurred. Mr J then brought his complaint to the Ombudsman.
What we investigated
We investigated Mr J’s complaint that HMRC had not interviewed him, or sought any information from him, before ruling that he was an employee. We also investigated Mr J’s complaint that the Adjudicator had not obtained sufficient redress for him.
Mr J told us that, following HMRC’s ruling, he had been unable to keep working for the hotel and had lost substantial earnings. He said he had also incurred significant costs and expenses, fallen into debt and suffered hardship.
What our investigation found
HM Revenue & Customs
HMRC’s guidance is clear about the importance of obtaining evidence from both parties to a contract when coming to a view about the status of a worker, and that all decisions should be evidence-based. HMRC should have considered Mr J’s position based on his current circumstances, and not assumed he would again decline to meet them. Without interviewing or seeking information from Mr J, HMRC issued an opinion in October 2005 based on incomplete information and which we concluded, on the balance of probabilities, was flawed. Any reasonable HMRC officer in possession of the relevant information would have determined that Mr J was self-employed, as the inspector subsequently did in July 2006. HMRC did not ‘get it right’ (in line with the Principles of Good Administration) when deciding that Mr J was an employee, and that amounted to maladministration.
These mistakes were compounded by HMRC’s failure to implement their dispute resolution procedures. They should have invited Mr J to dispute the decision if he disagreed with it, and made him aware that he could ask for a formal ruling against which he could appeal. Then, when Mr J complained to HMRC in February 2006, he raised issues that cast some doubt on the original decision, which he was clearly disputing. According to their guidance, HMRC should have asked to interview Mr J and then reviewed their opinion, but they did not do so. HMRC also failed to follow correct procedures when Mr J asked them to reconsider their decision in April 2006: they invited him to complain when they should have invited him for an interview. HMRC’s failure to follow their dispute resolution process and to ‘put things right’ (another of the Principles) amounted to maladministration.
HMRC failed to take proper account of the seriousness of their mistake. Although Mr J asked them to consider the worry and distress he had suffered, HMRC did not do so. Their failure to investigate Mr J’s complaint thoroughly was maladministrative. Although their decision about his status put him in a position where he stood to lose money, whether he continued his work at the hotel or not, it was not possible to quantify the precise extent to which his claimed financial losses were directly caused by HMRC and for which they should compensate him. For that reason, we found no maladministration in relation to HMRC’s failure to compensate Mr J for lost earnings and costs.
The Adjudicator’s Office
Although the report from the Adjudicator’s Office did not identify all of HMRC’s maladministration, the remedy they recommended was not unreasonable. Given the difficulties in quantifying the extent to which HMRC had caused the financial losses that Mr J had claimed, we did not consider the Adjudicator’s failure to recommend a payment for that to be maladministration.
Consequences
HMRC’s mistakes caused Mr J significant worry, distress and inconvenience. Although we considered his decision to resign was a disproportionate response to his situation, particularly as his finances were already precarious, he should never have been put in the position of having to choose to do the same work, but for less money, or give up his main source of income altogether. HMRC’s mistakes led to an avoidable breakdown in Mr J’s long-standing relationship with the hotel which caused him a great deal of worry, distress and inconvenience.
We upheld Mr J’s complaint about HMRC but we did not uphold the complaint about the Adjudicator’s Office.
Resolution
As a result of our recommendations HMRC:
- apologised to Mr J for the distress and inconvenience they had caused; and
- paid him £1,000 for distress, inconvenience and financial loss.
