[2011] UKFTT 313 (TC)

TC01174

Appeal number TC/2010/1565

National Insurance - earnings of worker supplied by service company - provision of services through intermediary – Company contracting to provide computer services – whether, if arrangements had taken the form of a contract between the worker and the client, the worker would have been employed by the client under a contract of service – No – Appeal allowed- Social Security Contribution (Intermediaries) regulations 2000, SI 2000/727, reg 6 (1) (c).  

FIRST-TIER TRIBUNAL

TAX 

	E C R CONSULTING LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: DAVID S PORTER (JUDGE) 
						ALBAN W HOLDEN (MEMBER)

Sitting in public at Albion House, Leeds on 17 and 18 February 2011

Matthew Boddington, a tax consultant, for the Appellant

Tony Burke, a tax inspector, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	E C R Consulting Ltd (ECR), appeals against the decision and determinations issued on 3 December 2007 in respect of liability to National Insurance Contributions (NIC) for the period 6 April 2002 to 27 March 2005 and liability  to PAYE income tax for each of the years 2002/03, 2003/04, and 2004/05. The decision and determinations were made pursuant to what is commonly known as the IR35 legislation, and related to arrangements where ECR indirectly provided the services of its sole director and shareholder, Miss Richardson, to Vertex Data Services (VDS) during the relevant period.
2.	The decision was made under Social Security Contributions (Intermediaries) regulations 2000, SI 2000/727 Regulation 6 (4) and the determination under Income Tax (Pay as You Earn) Regulations 2003, SI 2003/2682, Regulation 82
3.	ECR did not provide Miss Richardson’s service directly to VDS, but did so through arrangements with an agency company, Best People Ltd / Spring Technology. Miss Richardson is a highly skilled IT worker specialising in software development.
4.	Mr Matthew Boddington, a tax consultant with Accountax Specialist Tax Advisers appeared on behalf of Miss Richardson and called her to give evidence. Mr Tony Burke, from the Appeals and Reviews Unit at Leeds, appeared for HMRC and called Miss Hilary Harrison, a compliance officer, Miss Linda Brown, a team leader employed by VDS, and Mr Graham Holmes, a senior manager at VDS to give evidence. All the witnesses gave evidence under oath and we were provided with agreed bundles.
5.	We were referred to a substantial number of cases the principle ones being :-
•	Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497
•	Mersey Docks and Harbour Board v Coggins & Griffiths (Liverpol) Ltd [1946] UKHL 1
•	Hall (H M Inspector of Taxes) v Lorimer [1992] 1 WLR 939 (CA)
•	Dragonfly Consultancy Limited v The Commissioners for her majesty’s Revenue and Customs[2008] EWHC 2113 (Ch)
•	Nethermere (St Neots) Limited v Gardiner [1984] I.C.R. 612
•	Lime-it Ltd v Justin (office of the Board of Inland Revenue)[2003] STC (SCD)15
•	Tilbury Consulting Ltd v Margaret Gittins ( H M Inspector of Taxes) [2003] SPC 3020
•	Market Investigations Limited v Minister of Social Security [1969] 2 QB 173 
•	Stoddart v Cawder Golf Club [2001] EAT/87300
•	Express and Echo Publications Limited v Ernest Tanton [1999] EATRF 98/0528/3
The LAW
6.	Regulation 6 (1) of the Social security Contributions (Intermediaries) Regulations 2000, SI 2000/727 made under the Social Security Contributions and Benefits Act 1992 (the 1992 Act) provides:
	‘These regulations apply where-
a.	an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (“the client”),
b.	the performance of those services by the worker is carried out, not under a contract directly between the client and the worker, but under arrangements involving an intermediary, and
c.	the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would have been regarded for the purposes of parts 1 to V of the 1992 Act  as employed in employed earner’s employment by the client.’
‘Intermediary’ is defined in Regulation 5 and it is common ground that ECR is an intermediary for this purpose. ‘Employed earner’s employment’ is defined in section 2 (1) of the 1992 Act to include a person whom is gainfully employed under a contract of service (which is not further defined).The intermediary is treated as making, and the individual as receiving, a payment of deemed employment income calculated in accordance with the rules set out in the legislation in respect of which the intermediary has to account for PAYE and primary and secondary Class1 NIC.
7.	The legislation calls for a two stage exercise. The first is to find the facts as they existed during the period covered by the decision. The facts to be found are those that serve to indentify the ‘arrangements’ involving the intermediary and the circumstances in which those arrangements existed and the nature of the services performed by the ‘worker’. The second is to assume that the ‘worker’ (Miss Richardson) was contracted to perform the services to the client (VDS) and to determine, whether in the light of the facts, Miss Richardson would be regarded as VDS’s employee. The burden of proof lies with ECR and the standard of poof is on the balance of probabilities

The facts
8.	The parties are as follows:
Vertex Data Science Ltd ( the “Client”)	
                               
Best People Ltd /Spring Technology ( the ‘Agency’)	

ECR Consulting Ltd  (the “intermediary”) 	
                          
Miss Elaine Richardson ( the “worker”)	

Miss Richardson has been in business since June 1993 after having been made redundant by her previous employers. She told us that she did not want to risk being made redundant again and decided to become self - employed. As her expertise was in complex computer consultancy, she formed a company to prevent personal liability if she were to be sued. She appears to have had a large number of contracts, some of which have, in the past, run for nearly a year with the same clients. The average period appears to have been about 6 months. Her contract with Jaguar Land Rover, for instance, appears to have run intermittently from 20.8.2008 to 12.6.2010.  ECR has serviced up to 3 separate clients during the period 2002 – 2005; in 2006 and 2007 it serviced 2 separate clients. ECR has specialised computer equipment and an office. It promotes the company’s services through a website ( http:/www.ecr-consulting.
demon.co.uk).The Website contains details of Miss Richardson’s CV.

9.	Late in 2001, Miss Richardson was asked by Best People Ltd (Best) whether she wished to provide computer services to VDS but she refused as she was involved with another contract. She indicated that she would be pleased to help in the future if they approached her again. In February 2002 Best approached her again to see if she could help with the implementation of the Accenture Customer 1 billing system (with which she was familiar) for TXU Energy.  This meant moving the clients of TXU Energy from several mainframes at VDS’s building into a new billing system. She told us that she was not interviewed for the position and assumed that VDS had checked her web site which contained her CV.
10.	There was no direct contract between Miss Richardson and VDS. VDS had urgently required to find someone to help with the work and they had been approached by Best, who had suggested that they used ECR and Miss Richardson. VDS had been prepared to pay £600 per day for the services but insisted, in view of the very high daily fee, that should they terminate the contract with Best, they would not expect to pay a termination fee of the same order.
11.	This first contract between Best and ECR was for a period of 6 months from 6 March 2002 to 5 September 2002, but was extended by correspondence from 6 September 2002 to 27 December 2002. By a letter dated 18 October . Best terminated the contract on 18 November 2002. ECR did not employ Miss Richardson to work with Best or VDS again until 21 April 2003, a gap of 3 months. She had been apprehensive about working for VDS again after the early termination of the last contract. Best offered a rate of £300 per day to ECR for her services but she refused to work at that level. Eventually the rate was increased to £350 and she agreed to the work because of the poor state of the contracting market. The work involved converting all Powergen’s customers onto one platform- the Accenture Customer 1 system. 
12.	The second contract ran from 22 April 2003 to 25 July 2003, but following correspondence was extended to run from 11 August 2003 to 7 November 2003; and then from 24 November 2003 to 23 February 2004.
13.	 Best was taken over by Spring Technology Staffing Services Limited (Spring) who entered into four further contracts with ECR for Miss Richardson services at a rate of £350  per day for the following periods:-
•	15 March 2004 to 21 May 2004
•	22 May 2004 to 20 August 2004
•	23 August 2004 to 19 November 2004
•	22 November 2004 to 18 February 2005. This contract was extended by correspondence on 3 occasions to cover the following periods:
•	21 February 2005 to 11 March 2005
•	14 March 2005 to 20 March 2005
•	21 March 2005 to 27 March 2005. 
14.	In November 2005 Mrs Hilary Harrison, an HMRC Employer Compliance officer, commenced a review of the business records of ERC. She subsequently entered into correspondence with ECR’s agents, Lawspeed, about her findings. In April 2007, after concluding her enquiries, she sought the advice of a Status Inspector colleague, who considered the evidence provided by her and then informed Lawspeed that the IR35 legislation was applicable as regards Miss Richardson’s work for VDS. Mrs Harrison could not advise as to the Status Inspector’s thought process and he had not been called as a witness.
15.	Lawspeed did not agree that the IR35 legislation applied and consequently Mrs Harrison arranged, in December 2007, for the issue of Regulation 80 Determinations to ECR to recover additional tax as under:
            
            Notice of Regulation 80 determination	            2002/03  £8907.78
								2003/04  £8710.00
								2004/05  £9395.00
								-----------------------
							Total		£27,012.78	
She also arranged for the issue of a section 8 decision to recover Class 1 NIC of £24,539.74 for the period 6 April 2002 to 27 march 2005 (of which £7069.51 had already been paid).

The contracts
16.	     As indicated at paragraph 7 above, it is first necessary to consider the terms of the various contracts dealing with the employment. In this context there were three contracting parties. There are agreements between VDS and Best/Spring, and contracts between Best and ECR. The contracts between VDS and Best/Spring produced to the Tribunal were less than satisfactory as they were unsigned by either party and appear to be generic agreements provided by VDS as their “IT Procurement Services” contract. As it appears that the agreements have been acted on by the parties, we are treating the agreements as valid and determinative for the purposes of this appeal. 
17.	The first contract between VDS and Best appears to be Version 1.0 (27.4.01) and provided that Best had to find a suitable contractor, which it sourced from ECR having seen Miss Richardson’s CV on ECR’s website. The contract provided that VDS would be charged within the appropriate bandwidths (as fixed by VDS presumably in agreement with Best) for the level of personnel required, which rate would be fixed for 12 months. The parties conceded that the rate paid by VDS to Best was different to that paid by Best to ECR. From the figures in the contract the difference appears to have been substantial. For example Appendix 4 rates run from £988 to £1400. The contract specifically named Miss Richardson to be the personnel for the purposes of the contract.
•	Clause 4.3 states that Best will supply a contractor who “will perform to a standard consistent with the requirements specified by VDS, and that the contractor will be replaced within 3 working days if Best has been informed by VDS that the contractor was not satisfactory. It also provided as follows.
“The Consultants who are unable to fulfil their duties to the standard required will be replaced by the Agency if required”…
•	4.6 payment of invoices would be in 30 days
•	4.10 Best is to indemnify VDS against all losses, liabilities, claims, costs and expenses and insure the same up to £2,000,000
•	4.15 VDS could terminate the contract on 4 weeks notice.

The second contract between Best and VDS appears to be Version 2.0 (1/4/2002). Again the contract is unsigned and it is agreed that for the purposes of this appeal the terms are the same as the earlier contract.

18.	The six Contracts above between Best and ECR are all in the same format and provide that ECR is the supplier of the services, which will be performed by Miss Richardson, the personnel named in the schedule. The rate for the first contract was £600 per day, which is equivalent to £140,000 per annum allowing for weekends and holidays. The subsequent contracts were at £350 per day equivalent to £84,000 on a similar basis. The level of payment indicates that miss Richardson is clearly a knowledgeable computer expert capable of handling complex work.
19.	The contracts between Best and ECR provided at :
•	1 b) The Supplier (ECR) warrants that the Services shall be initially performed by such personnel named in the Schedule (in this case Miss Richardson). The Supplier may propose a replacement to perform the Services in substitution for the named personnel, but any such proposed substitute shall only be accepted if approved in writing by Best and the client.
•	2 c) At the end of the initial engagement Best shall be under no obligation whatsoever to offer further work to the Supplier and the Supplier shall be under no obligation whatsoever to accept any further work, if offered.
•	3 a) provides for indemnity from ECR to Best in similar terms to the VDS contract, and that ECR will indemnify Best against any income tax (whether PAYE or otherwise) or primary National Insurance Contributions…
•	4 b) invoices are to be raised against time sheets
•	5 c) Best are entitled to terminate the contract on 28 days notice or pay ECR in lieu of notice.
20.	It appears that there was no contract between Miss Richardson and ECR, due to the fact she is the single shareholder and Director of the company. We take the view that the terms of the other contracts are relevant when considering the manner in which Miss Richardson worked at VDS. The contracts have been entered into by parties other than Miss Richardson. The other parties must have intended the tems of the contracts to be enforceable. There have been numerous cases in the High Court, this Tribunal and the Employment Tribunal relating to the status of an individual’s employment, all of which depended on the specific facts of the specific cases. We are bound by the High Court’s decisions but not those of the Tribunal, although we are bound to consider them. In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 433 (Ready Mixed) MacKenna J listed three conditions for a contract of service to exist:
(1)	The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master
(2)	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 the other master
(3)	The provisions of the contract are consistent with its being a contract of service
These conditions are fundamental to the creation of a contract of services and if any one of them cannot be met then the contract is not a contract of service.
21.	Lawspeed wrote to HMRC on 6 July 2007 setting out in considerable detail the reasons why they considered Miss Richardson was not an employee. Mr Boddington has adopted those matters for the purposes of this appeal. The numerous cases identify the various matters which need to be considered, which overlap with those in Lawspeed’s letter. We propose to use the headings in the letter and to indicate where Mr Burke, on behalf of HMRC, is in disagreement.
Substitution
22.	Both of the contracts allowed for substitution. Mr Burke suggested that the contracts named Miss Richardson as the operative and the substitution clauses required VDS to consent to a substitute. As a result the service was personal to Miss Richardson and as the substitution clauses required the consent of both parties they were fettered and, as such, were not absolute in their terms. Mr Holmes, a senior manager at VDS, stated, in the meeting that HMRC had with him and Mrs Brown on 8 April 2010 that the use of contractors was a budgetary matter. Contractors were employed to control risk in relation to expenditure. This was evidenced by the need to pay £600 per day for Miss Richardson on the first contract reduced to £350 in the second.  VDS needed to bring in appropriate people with the necessary skills on a short term basis to help out with various projects. Both Mrs Brown and Mr Holmes said that VDS would not have accepted a substitute.  Given that VDS was prepared to employ Miss Richardson on a contract at £600  without ever having met her, we are satisfied that if she had been unable to attend through illness or had been unsatisfactory, VDS would have returned to Best/Spring under the substitution clause for them to supply another contractor with sufficient, skills, qualifications and experience. Miss Richardson confirmed that she could have sent other people to do the work as she knew of at least 6 others who were suitably qualified
 Control
23.	A working relationship which involves no control at all from a manager is unlikely to be classed as employment. Mrs Brown stated that she had overall control of Miss Richardson. We accept that she needed to advise Miss Richardson of the way in which VDS worked, although she accepted that VDS had no manuals or directions as to office procedures specifically for either the employees or the contractors. We do not accept, even with the qualifications she advised us of, that she was able to tell Miss Richardson how to do the work or the time she should expend in doing so. Miss Richardson produced to the Tribunal her internal time sheets for the time she worked on the project. These had been completed to comply with the European working directives, but bore no relationship to the time records kept by VDS.  The records, prepared for the purposes of the agency contracts and invoices for Best, merely identified that she had worked for 37 ½ hours each week. Miss Richardson’s time sheets reveal variations from 31 hours to 45 hours each week. From these time sheets it is clear that the hourly rate she was paid was based on 37 ½ week. If she worked longer or shorter hours she received no more money. The fact that she could work the hours she pleased clearly shows that she was not controlled by Mrs Brown in relation to her working practices. 
24.	The two contracts, clauses 7(b) Best and 1.8 (Spring) provided that the agreements cannot be varied without the consent of Best/Spring, therefore VDS cannot be said to have daily control. Clauses 1(g) (Best) and 2.6 (Spring) indicate that Best/Spring is to decide the method of working and use its own skill and expertise to provide the services. VDS has no control over how the work is done nor when the services are to be performed save for obvious opening times of the offices and the fact that the work had to be carried out there. The fact that Miss Richardson was given a personal pass does not in our opinion make her an employee.
25.	   The IR Employment Status Manual states 
	“ …if working on large sites where access is limited to normal working hours, the worker is not going to be able to work as and when she or he pleases [and] the limitations put on when the work can be carried out tells us nothing about the status”.
Mr Burke commented that Ready Mixed suggested that:
“ Control includes the power of deciding the thing to be done., the way in which it shall be done, the means employed in doing it, the time when and the place where it shall be done.  It is the right of control not whether it is exercised”.
Mrs Brown explained that she was the Design Team Leader at the time Miss Richardson was engaged to work for VDS and that Mr Holmes was her immediate Line Manager. The design team consisted of between 12 and 14 workers and included VDS employees. The project team moved from their original base in Manchester to its Bolton office.  Miss Richardson was part of the design team that would produce a technical specification that identified the changes required to the IT system. The VDS employees performed the same type of work as Miss Richardson. We accept that Mrs Brown had experience in the implementation of the system and that she was responsible for allocating and prioritising the work for the team.  She told us that VDS operated a Peer Review system for the monitoring and maintenance of standards. We do not accept that these reviews were to ensure that Miss Richardson had dealt with the system correctly, but rather for the whole team to examine how the project was progressing with a view to resolving problems.
26.	 During her first contract, when she worked in Bolton, she had rented accommodation, and had had to continue the payments, although VDS had terminated the first contract earlier than was expected. It is unlikely that an employee would have been left with the liability to pay the additional rent. Mrs Brown indicated that all the individual on her team were engaged because of their professional experience and skill. Further, her own annual salary was on the region of £30,000 compared o Miss Richardson’s initial pay which equated to £140,000. There has to be a sufficient degree of control exercisable, consistent with the contract of employment. We have decided that VDS did not have sufficient control.

Financial risk
26.	 Mr Burke suggested that Miss Richardson took no financial risk. She did not have to buy any equipment to carry out her work. The invoices were all paid on time so there was no risk of a bad debt. She had no opportunity to carry out any other work during the time she worked for VDS, so that there was no opportunity for her to make an additional profit. We do not accept that there was no financial risk. Given the amount that VDS was paying on all the contracts it would have been justified in suing Best, Best would then have sued ECR if there was negligence on the part of Miss Richardson. Clauses 3 (a) (Best) and 7.1 (a) (Spring) created an obligation to indemnify VDS. We note that consequential loss has not been excluded, so that the liability could have been substantial. If the contracts were not handled with the appropriate skill, the contracts could be terminated immediately.  Clause 5 (e) (Best) and 9.3 (Spring). Miss Richardson advised us that ECR carried comprehensive insurance as the growing compensation culture increased the risk of being sued.

 Opportunity to profit

27.	   In Hall (H M Inspector of Taxes) v Lorimer [1992] 1 WLR 939 (CA) Mummery J stated of somebody who is self-employed:
	    “He has the opportunity of profiting from being good at being a vision mixer. According to his reputation so there will be a demand for his services for which he will be able to charge accordingly. The more efficient he is at running the business of providing his services the greater his prospect of profit. “
Miss Richardson did, in fact, perform services for two other clients whilst working for VDS. These involved providing advice as to the most appropriate hardware and software required by the businesses, and the procurement, installation and set up of that equipment for them.
Personal factors

26.    Miss Richardson provided the details of the contracts that ECR had had since starting in business in June 1993 referred to in paragraph 6 above. In Hall (H M Inspector of Taxes) v Lorimer [1992] 1 WLR 939 (CA) Mummery J stated:
 “ If a skilled worker works for a number of clients throughout the year  and has a business-like approach to obtaining his engagements ( perhaps involving expenditure  on office accommodation, office equipment, etc) this will point towards self-employment”
Mr Burke pointed out that all of the contracts named Miss Richardson as the operative. He considered that that meant that the contracts were personal to her and that this fulfilled the first of the conditions set out in Ready Mixed. Mr Holmes made it clear in the interview with HMRC on 8 April 2010 that the contractors were used as a budgetary measure and we are satisfied that VDS were not concerned who did the work so long as they were suitably qualified. They appear to have been content to leave the choice of operative to Best/Spring. We cannot therefore accept that the work was personal to Miss Richardson.

27.   	Miss Richardson told us that she tended to take holidays when she was not working as she needed to provide a specialist service to the clients. She accepted that all the services had to be provided at VDS to tie in with their computer systems and, as the information was sensitive, VDS did not want information either taken off the  site or downloaded on to her equipment at home. 
In business on her own account. 

28.       In Market Investigations Limited v Minister of Social Security [1969] 2 QB Cook J said the test to be applied is; 

“Is the person, who has engaged himself to perform those services, performing them as a person in business on his own account? If the answer is Yes then the contract is a contract for services. If the answer to the question is No then the contract is a contract of services.”

ECR is in business on its own account. Miss Richardson produced to the Tribunal copy business cards and company stationary. ECR operates from a dedicated business area at her home. It has company domain and website. ECR advertises its services and is a member of the PCG. It has retained reserves and invested in development and has over the years taken on fixed price work for a variety of clients.

Right of dismissal

29.  By Clause 5 (e) of the Best agreement Best can terminate the contract with ECR if the services are not satisfactory. By (9.3 of the Best/ Spring) agreement Spring can terminate the contract with ECR “forthwith” for lack of performance. This is reflective of a commercial agreement and is an indicator of self-employment. Mr Burke suggested that a typical self-employment contract will come to an end on the completion of the work for which the contractor was engaged, whereas an employment contract usually contains provisions allowing one or other party to give notice of termination. A power to terminate an engagement for reason other than a serious breach of contract is indicative of a contract of employment. Miss Richardson had worked for VDS for a considerable length of time and the proposals in the contracts are at best neutral. We can not accept that terms in the contract are neutral, as VDS did terminate the first contract early, which effectively meant that Miss Richardson was no longer working.

Intention
30. Mr Burke suggested that intention is only relevant as a “tie breaker” in determining status (when indicators are evenly balanced). In the IR35 situation, it is not possible for the parties to have any intention over a hypothetical contract. Lawspeed have pointed out that in Stoddart v Cawder Golf Club [2001] EAT/87300 it was suggested
 “ Where persons intend to create a self-employment situation and the ingredients of such can be found, such as the method of payment, potential exposure to VAT and the lack of consent to be an employee, it is very difficult  for any Tribunal to conclude that the contrary to what the parties had intended to achieve had resulted”.

Clause 7 (c) (Best) and 1.2 (Spring) explicitly states that there is no intention to form an employment relationship. Mr Burke noted that clause 7.2(b) (Best/Spring) agreement with ECR provided that ECR would indemnify Best from any liability for income tax national insurance contributions and otherwise. In Dragonfly Consultancy Limited v The Commissioners for her majesty’s Revenue and Customs[2008] EWHC 2113 (Ch) Henderson J said:
	“ In the majority of cases, however, such statements will be of little, if any, assistance in characterising the relationship between the parties….If the actual contractual arrangements between the parties do include statements of intention, they should in my view be taken into account, and in a suitable case there may be material which would justify the inclusion of such a statement in the hypothetical contract. Even then, however, the weight to be attached to such a hypothetical contract would in my view normally be minimal”.
We consider that the contracts cannot be ignored and their intention can be consider when considering the terms of the hypothetical contract.

Mutual obligations

24.	31.    The agreements indicate that no mutual obligation exists between VDS and ECR (Clause 2 (c) (Best) and 1.2 (Spring)) explicitly state that Best/Spring shall be under no obligation whatsoever to offer  further work to ECR nor will ECR be under any obligation to accept any future work, if offered. Ditto 1.2 (Spring). Mr Burke suggests that under the terms of the hypothetical contract Miss Richardson would be required to provide her own work and skill in return for agreed pay. Thus the irreducible minimum of mutual obligations would be present in the hypothetical contract. We cannot accept that. As indicated earlier we believe that VDS was unconcerned as to who the contractor should be they were merely interested in obtaining a necessary skill for the shortest period of time as cheaply as possible. We do no accept that there was any mutuality of obligation.
Submissions
Mr Burke
32.	 We do not propose to re-iterate matters which have already been considered when reviewing the evidence, but rather to record the principle matters which Mr Burke and Mr Boddington have raised in their final submissions to the Tribunal. Mr Burke submitted that Henderson J set out the reasons for IR35 in Dragonfly Consultancy Limited v The Commissioners for her majesty’s Revenue and Customs[2008] EWHC 2113 (Ch) in the following terms:
  “The background to the IR35 legislation … is fully set out in the judgment of Robert Walker LJ in R(Professional Contractors Group) v IRC[2002] STC 165. In paragraph 51 of his judgment…he described the aims of both the tax and NIC provisions as being.. .. ‘to ensure that individuals who ought to pay tax and NIC as employees cannot, by the assumption of a corporate structure, reduce and defer the liabilities imposed on employees by the United Kingdom’s system of personal taxation’ ”.   
The legislation requires the Tribunal to accept that the hypothetical contract that Miss Richardson is deemed to have entered into with VDS is one of employment. That, he submitted, is best achieved by ‘painting a picture’ [as suggested by Mummery J in Hall (H M Inspector of Taxes) v Lorimer [1992] 1 WLR 939 (CA)]. As a result it is necessary to give appropriate weight to each of the matters, which have been considered. 
33.   In that context he submitted that
•	as Miss Richardson was named in the schedule to the agreements she was required to work for VDS in her personal capacity; 
•	she had worked for a considerable time with VDS
•	and she had been paid on a monthly basis 
•	there was, therefore, a clear contract of employment with VDS
 That proposition was further enhanced when it was realised that Miss Richardson had to work under the control of Mrs Brown in the Design Team. She was not free to come and go as she pleased and was required to work at VDS’s premises. The suggestion that Best/Spring had the right to substitute another contractor for Miss Richardson was illusory. Best/Spring could only do that if VDS were dissatisfied with her performance and consented to the next contractor. In those circumstances the basis of the substitution was fettered and did not amount to a right to substitute at all. Such a right could not be incorporated in the hypothetical contract.
34.    There was no prospect for her to make any further profit as she had to work full time for VDS. The agreement between Best and ECR required ECR to be responsible for paying the PAYE and NIC liabilities as would a contract of employment. In addition, Miss Richardson took no financial risks nor did she need to supply any of her own equipment to carry out the employment. In those regards, the terms of her hypothetical contract would be the same as the employees for VDS. She was, through the employment, part and parcel of the organisation and as a result the hypothetical contract would be one of employment and she would not have been engaged by VDS on a self-employed basis. The hypothetical contract incorporated the 3 prerequisites set out by MacKenna J in Ready Mixed and the assessment must be upheld.

Mr Boddington
35.	Mr Boddington confirmed that the parties have agreed that for the purposes of this appeal there is no material difference between the test under the Tax legislation and the NIC legislation. The legislation does not assume what the nature of the contract is: it seeks to determine the type of contract the hypothetical contract would be either a contract of employment or a contract for services by reference to the    ‘circumstances’ and ‘ arrangements’.  This requires a hypothetical or notional contract to be inferred from those ‘circumstances’ and ‘arrangements’ as required by Regulation 6 (1) (c) of the NIC legislation and the equivalent tax legislation. He submitted that superficially it was difficult to tell the difference between the two types of contract. The work being done was similar to that carried out by the employees of VDS. It is necessary to consider the written contracts between the parties. There is no such contract between Miss Richardson and ECR. There were, however, contracts between ECR and Best/Spring and Best/Spring and VDS. The contract of 5 March 2002 between ECR and Best pre-dates the period of the assessment. The material parts of that contract should, therefore, be imported into the hypothetical contract.
36.    In Express and Echo Publications Limited v Ernest Tanton [1999] EATRF 98/0528/3 Peter Gibson LJ held that as Mr Tanton’s contract had a specific provision to the effect that he could supply a substitute driver, the contract had to be one for services. As a result the case did not pass the irreducible minimum of mutual obligations as set out in Ready Mixed. The right to substitute means that the contract cannot be personal to the contractor. The agreements between Best/ Spring and VDS make provision for a substitute. The reality of the case is that VDS would have requested that Best/Spring should find a replacement for Miss Richardson, if the occasion arose. The substitution clause is still affective even if the consent of VDS is required. If Mr Burke is right and the clause is fettered it is still a clause which would not appear in a contract of services, but in a contract for services.
 37.	ECR was engaged for the performance of a specific project. There has never been any other obligation on Best/Spring or VDS to offer work to ECR or on ECR to accept such work. What occurred was the impact of market forces typical of the freelance contracting market place. It is a situation and a relationship that is typical of self-employment and atypical of an employer/employee relationship.
38.	Clause 1(g) in the agreement between ECR and Best provided that ECR ‘shall be expected to exercise a degree of control as to the method of the performance of the services’. It also provided that the contractor would use reasonable endeavours to see that VDS standards and methods were complied with. Mrs Brown exercised no real control over the way Miss Richardson carried out the contract. There appears to have been no employee policies, procedures or guidance available for any of the contractors. Miss Richardson was able to decline to work for VDS after the early termination of the first contract and was always free to do the same at any time. These rights are not normally found in a contract of services.
39.	There was no provision in the agreements for holiday entitlement, holiday pay, sick pay, the provision of a vehicle, or a contribution to a pension fund. Most of these provisions would appear in a contract of service. Further the case of  Lime-it Ltd v Justin (office of the Board of Inland Revenue)[2003] STC (SCD)15 and Tilbury Consulting Ltd v Margaret Gittins ( H M Inspector of Taxes) [2003] SPC 3020 are similar to this appeal as they dealt with contractors in the computer industry and found that the contracts were contracts for services. In the circumstances the assessment should be dismissed and the appeal allowed
The decision
40.	We have considered the facts and the law and have decided that Miss Richardson was employed under a contract for services. Miss Richardson decided to become self employed when she was made redundant and in 1993 set up ECR. We consider that given the level of responsibility she has taken over the years that it was prudent of her to operate under the protection of a limited company. We accept that that in itself would not prevent the hypothetical contract being a contract of services. We have however considered the matter in the round and concluded that the hypothetical contract would be one for services for the following reasons:
a.	Unlike many of the case we have been referred to, this case has two agencies- Best/Spring and ECR. Miss Richardson was not a party to the contract between VDS and Best/Spring. As submitted by Mr Boddington, we accept that, where the parties have entered into formal contracts, the terms of those contracts have to be imported into the hypothetical agreement between Miss Richardson and VDS.
b.	The HMRC interview of 8 April 2010 clear shows that VDS used their contractors on the basis that they could obtain the best advice at the most reasonable price. VDS appear to have relied on Best/Spring to provide the contractors. It appears that it was immaterial who was appointed, so long as that person had the necessary skills. We do not accept that in reality the substitution clause was in any way fettered as suggested by Mr Burke. On that basis we are satisfied that the hypothetical contract would have to have a valid substitution clause, which could only be found in a contract for services.
c.	 VDS were prepared to negotiate the best price at the time, which in this case, was £600 for the first contract and almost half that amount for the second contract. The hypothetical contract would have to have a clause, which gave VDS the opportunity to fix the remuneration to be paid on their terms. It would not be possible to control an employees pay in that manner and a contract of service would make no such provision.
d.	Whilst we accept that Mrs Brown represented VDS with regard to the management, we do not accept that she had any real control over the way in which Miss Richardson worked. It is unusual that VDS were content to accept invoices showing the work for the week as being 37.5 hours when it is clear from Miss Richardson’s internal records that the hours she worked varied from week to week. That is consistent with a contract at an agreed price, which leaves the contractor to deliver the same as best he or she might. A contract of services would specify a 37.5 hours working week and would make no provision for the employee to provide variable cover without consent.
e.	The termination provisions made it clear that there was no obligation on either party to employ the other or work for the other. This was demonstrated when Miss Richardson refused initially to work for VDS, also when VDS subsequently terminated the first contract prematurely. The hypothetical contract would have to make provision for this. This is not a provision that would be found in a contract of services.
f.	In ‘painting the picture’ it is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation. The terms of the hypothetical contract would result in a contract for services.
The findings of fact and the application of the statutory assumptions to those findings do not support the decisions appealed against. We therefore allow the appeal. We make no order for costs as none have been requested.
41.	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.

TRIBUNAL JUDGE
RELEASE DATE: 11 May 2011