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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Alternative Book Company Ltd v Revenue & Customs [2008] UKSPC SPC00685 (19 May 2008) URL: https://www.bailii.org/uk/cases/UKSPC/2008/SPC00685.html Cite as: [2008] UKSPC SPC685, [2008] UKSPC SPC00685 |
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Spc00685
INCOME TAX & NATIONAL INSURANCE – IR35 - Worker supplied through intermediaries – whether circumstances were such that had the services been provided under a contract directly with the worker the worker would have been an employee –Ye s– Appeal dismissed
SPECIAL COMMISSIONERS
ALTERNATIVE BOOK COMPANY LIMITED Appellant
- and -
HER MAJESTY'S REVENUE and CUSTOMS Respondents
Special Commissioner: MICHAEL TILDESLEY OBE
Sitting in public in Cardiff on 22 and 23 January 2008 with final representations by 27 February 2008
John Antell counsel instructed by Lawspeed Limited for the Appellant
Susan Jones and Colin Williams, HM Inspectors of Taxes for the Respondents
© CROWN COPYRIGHT 2008
DECISION
The Appeal
The Evidence
(1) Mr Christopher Saunders, HMRC Employer Compliance Officer, who was present at the interviews with Mr Shepherd on 10 October 2002 and 10 December 2004.
(2) Mr David Lewis, HM Inspector of Taxes, who carried out the investigation into the Appellant's tax affairs.
(3) Mr Derek Gigg, Head of Service Delivery Management at Gerling NCM, who was previously a manager responsible for software development at Gerling NCM, and one time manager to whom Mr Shepherd reported.
(4) Mr Stephen Prentice, Manager IT Services at Gerling NCM, Mr Shepherd nominated Mr Prentice as the person to speak to the Respondents about his working relationship at Gerling NCM.
(1) The Upper Level (Computer People Limited & Gerling NCM): copies of contracts extending the terms of assignment covering the period 16 August 1999 to 26 April 2002, and copies of contract SP862 and extension from 27 April 2002 until 25 October 2003. A copy of the first known main contract, SP861, was not available.
(2) The Lower Level (Computer People Limited & Appellant): copies of contracts extending the terms of assignment of CPL98 covering the period 3 April 2000 to 29 September 2000, copies of an unsigned CPL00 and extensions covering the period 2 October 2000 to 25 April 2002 and a copy of, CPL02 covering the period 25 April 2002 to 25 October 2002, outside the periods under appeal. A copy of the first known main contract, CPL98, was not available
Preliminary Issue
"whether the services which Mr Shepherd provided to Astradius (formerly Gerling NCM) under a number of separate assignments… to 2005 were caught by the IR35 legislation."
(1) The question for determination is whether the IR35 legislation should apply in principle to the whole of the work undertaken by the Appellant for Gerling NCM for the tax years 2000/01 and 2001/02.
(2) The parties are entitled to call evidence relating to events and arrangements outside the tax years 2000/01 and 2001/02 provided the evidence is relevant to the disputed issue and no severe prejudice is caused to the other party by the late disclosure of the evidence.
The Legislation
'1--(1) This Schedule applies where--
(a) an individual ("the worker") [Mr Shepherd] personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client") [Gerling NCM],
(b) the services are provided not under a contract directly between the client [Gerling NCM] and the worker [Mr Shepherd] but under arrangements involving a third party ("the intermediary") [Alternative Book Club], and
(c) the circumstances are such that, if the services were provided under a contract directly between the client [Gerling NCM] and the worker [Mr Shepherd], the worker would be regarded for income tax purposes as an employee of the client [Gerling NCM]. ...
(4) The circumstances referred to in sub-paragraph (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.'
'6--(1) These Regulations apply where--
(a) an individual ("the worker") [Mr Shepherd] personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client") [Gerling NCM],
(b) the performance of those services by the worker [Mr Shepherd] is carried out, not under a contract directly between the client [Gerling NCM] and the worker [Mr Shepherd], but under arrangements involving an intermediary [Alternative Book Club], and
(c) the circumstances are such that, had the arrangements taken the form of a contract between the worker [Mr Shepherd] and the client [Gerling NCM], the worker [Mr Shepherd] would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner's employment by the client [Gerling NCM].'
Construction of the Legislative Provisions
"A more general point of construction is worth spelling out at this stage. The conditions of sub-paragraphs (a) and (b) involve an analysis of the actual facts and legal relationships, but when that analysis shows that those two sub-paragraphs are satisfied sub-paragraph (c) involves an exercise of constructing a hypothetical contract which did not in fact exist, and then enquiring what the consequences would have been if it had existed. There may be room in some cases for dispute about what the hypothetical contract would contain and in the present case there is".
"However, no-one has suggested to me, nor do I consider, that that or the other minor differences between the two statutory provisions affects this case or opens a possibility of the case being decided one way for NICs and another way for income tax and corporation tax".
"It appears to me clear that the Revenue must bear in mind that under IR35 they are not considering an actual contract between the service company and the client but imagining or constructing a notional contract which does not in fact exist. In those circumstances of course the terms of the contract between the agency and the client as a result of which the service contractor will be present at the site are important, as would be the terms of any contract between the service contractor and the agency. But particularly given the fact that, at any rate at present, a contract on standard terms may or may not be imposed by an agency, or may be applicable not by reference to a particular assignment, but on an ongoing basis, and may actually bear no relationship to the (non- contractual) interface between the client and the service contractor, such documents can only form a part, albeit an important part, of the picture."
My Approach
The Legal Principles
'A contract of service exists if these three conditions are fulfilled. (i) 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. (ii) 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 that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.'
'Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done.'
In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person's work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted by viewing it from a distance and by making an informed, considered qualitative appreciation of the whole. It is matter of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in important from one situation to another.
(1) the express or implied rights and duties of the parties;
(2) the degree of control exercised over the person doing the work;
(3) whether the person provides his own equipment and the nature of the equipment involved in his work;
(4) whether the person hires any staff to help him;
(5) the degree of financial risk taken by him;
(6) the degree of responsibility for investment and management;
(7) the opportunity of profiting from sound management of the task.
(1) the understanding or intentions of the parties;
(2) whether a person has set up a business-like organisation of his own;
(3) the degree of continuity in the relationship between the person performing the services and the person for whom he performs them;
(4) how many engagements he performs, and whether they are performed mainly for one person or for a number of different people;
(5) whether the person performing the services is accessory to the business of the person to whom the services are provided or is part and parcel of the latter's organisation.
The Facts
Established Tax Treatment of Mr Shepherd
Continuity of the Relationship with Gerling NCM, Exclusivity of Service and Business on Own Account
Mutual Intention
Mutuality of Obligation and Hours Worked
Personal Service
- The Appellant must give 14 days written notice for replacement of personnel.
- The original personnel's absence must not interfere with the performance of the specification or with any agreed timeframe.
- Gerling NCM has the right to refuse the personnel on any reasonable grounds.
The following confirms the contractual arrangements between Gerling NCM (Client) and Alternative Book Company Limited (Contractor):
- The services are to be supplied by Keith Shepherd on behalf of the Contractor.
- The Contractor has the right to replace Keith Shepherd with a substitute who will carry out the services as specified in the contract.
- If the Contractor provides a substitute who has the necessary skills to carry out the services specified in the contract, the Client agrees to accept that substitute.
- The Contractor remains responsible for the payment of, and the work done by the substitute.
Control
"devote such time, attention, skill and ability as is necessary to attain a high standard of performance of the service in accordance with the requirements of the client [Gerling NCM] at the location or at such location as the client may reasonably require".
"As agreed between the Gerling NCM and the Appellant services shall include quality initiative projects and associated mini projects".
Provision of Equipment
Financial Risk
Part and Parcel
The Submissions
The Appellant
"the driver was unable or unwilling to perform the services personally he shall arrange at his own expense entirely for another suitable person to perform the services"
" ….in my judgment, it is plain from clause 3.3 that the applicant, as a matter of contract, was not obliged to perform any services personally himself if he was unwilling or unable to do so, provided that he could find a substitute driver".
" In those circumstances, it is, in my judgment, established on the authorities that, where, as here, a person who works for another is not required to perform his services personally, then as a matter of law the relationship between the worker and the person for whom he works is not that of employee and employer".
"The application of the general test may be easier in a case where the person
who engages himself to perform the services does so in the course of an
already established business of his own; but this factor is not decisive, and a
person who engages himself to perform services for another may well be an
independent contractor even though he has not entered into the contract in
the course of an existing business carried on by him"
The Respondents
"The law as I see it is this: If the true relationship of the parties is that of master and servant under a contract of services, the parties cannot alter the truth of that relationship by putting a different label upon it …..On the other hand, if their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true relationship between them".
Findings of Fact
(1) The termination provisions in the contracts, Gerling NCM could not finish the contract on the grounds of no work without giving four weeks notice.
(2) The periods of the contract which were relatively short and aligned to the duration of specific projects.
(3) The clear expectation on the face of the contracts that Gerling NCM would supply 36 hours of work per week.
(4) The fact that Mr Shepherd did work on average 35.25 hours per week throughout the two tax years under Appeal, which included weeks when Mr Shepherd chose to take a holiday.
(1) The what: Gerling NCM assigned Mr Shepherd to specific IT projects in accordance with its priorities. Within a project Mr Shepherd was allocated certain tasks to do. Gerling NCM retained the right to move Mr Shepherd to other projects which happened on one occasion. I was not convinced by Mr Shepherd's evidence that he would only accept a contract if the project met his needs. The tenor of Mr Shepherd's evidence was that he was keen to show commitment to guarantee the renewal of the contract with Gerling NCM. Further he took no steps to find alternative work but awaited the offer of a new contract. His evidence suggested that he would accept whatever the work given to him by Gerling NCM.
(2) The how: Mr Shepherd was not subjected to daily supervision by a line manager. Mr Prentice for Gerling NCM was focussed on delivering projects on time to the correct quality standard, which were achieved by project team members reporting regularly on progress and subjecting outcomes to quality assurance processes. Mr Shepherd was obliged to report regularly on progress and provide the project manager with formal reports monthly. The quality of his work was assessed by the quality assurance team. The controls of reporting and quality assurance exercised over Mr Shepherd's work were the same as those applied to Gerling's employees working on IT projects. Finally I am satisfied that Mr Shepherd worked as a member of team not generally on his own.
(3) The where: Mr Shepherd accepted that he was required to attend the offices of Gerling NCM in Cardiff to perform his services. The work done from home was minimal and generally out of choice.
(4) The when: I am satisfied from the evidence that Mr Shepherd did not have freedom to choose his hours of work and take leave without prior authorisation. I find that Mr Shepherd could choose his start and finish times provided he was in attendance during the core hours. This was the same arrangement given to members of staff working flexi-time. Mr Shepherd required prior authorisation to take leave as was clear from the contract documentation and the evidence of Messrs Gigg and Prentice.
(1) The upper level contracts specified Mr Shepherd as the consultant supplying the services. The Appellant was not identified in the upper level contracts until 27 April 2002. The lower level contracts also named Mr Shepherd as the consultant.
(2) Gerling NCM recruited Mr Shepherd directly for his IT expertise. Gerling NCM interviewed Mr Shepherd as an individual not in his capacity as a director of a service company.
(3) The substitution clause added to the contracts from 2 October 2000 did not give the Appellant an unfettered right to provide a substitute in place of Mr Shepherd. Gerling NCM was entitled to refuse the substitute offered on any reasonable grounds. I placed no weight on the joint statement of Mr Gigg and Mr Shepherd dated 16 February 2005 which indicated that Gerling NCM would accept a substitute with the necessary skills. I accepted Mr Gigg's explanation that the words used in the statement were not his, and that any substitute offered would have to go through the same recruitment process as applied to Mr Shepherd. Mr Shepherd admitted in his interview on 10 October 2002 that the substitution clause was of no practical effect: Gerling NCM would either tolerate his absence allowing him to continue with the contract, or would terminate his contract and find someone else. In the same interview Mr Shepherd accepted that the substitution clause was inserted to meet any potential IR35 challenge. Further the facts showed Mr Shepherd performed the services throughout the seven years he worked for Gerling NCM. The Appellant offered no substitute during the seven years, which in any event would not have been possible because Mr Shepherd was its sole employee. I attach no weight to the example given of Mr D, which was hypothetical since Mr D was retiring. Overall I conclude that the substitution clause was window dressing, and that Gerling NCM would have replaced Mr Shepherd if he was unable to carry out the work.
(4) The substitution clause at its highest was no more than a right to nominate another person in the event of Mr Shepherd being unable to perform his duties. However, on the facts found I consider that if Gerling NCM had been contracting directly with Mr Shepherd it would not have agreed to a substitution clause. This conclusion was supported by the fact that the contracts up to October 2000 did not include a substitution clause.
(5) Although there was no right to sue Mr Shepherd for non-performance, the lower level contract could be terminated without notice if Gerling NCM considered Mr Shepherd to be technically incompetent.
(1) Mr Shepherd had an established record of paying tax as a self employed person.
(2) Gerling NCM provided Mr Shepherd with the equipment necessary to do the job.
(3) Mr Shepherd was not exposed to significant financial risk with his engagement with Gerling NCM. He was remunerated on a fixed fee basis and had no capital invested in the assignment. Mr Shepherd, however, did not have job security or the benefit of sickness pay. There was a possibility that his contract would not be renewed, although on the evidence Mr Shepherd expected it to be renewed as he would await the offer of a new contract before looking for other work.
The Hypothetical Contract
(1) During the period of the hypothetical contract there would be several fixed term contracts typically ranging from three to six months. The contract would have a clause requiring Gerling NCM to give notice whether it intended to renew the contract on the same or similar terms.
(2) A requirement for Mr Shepherd to provide personally the services of an IT specialist
(3) Mr Shepherd would be assigned by Gerling NCM to quality initiative projects and associated mini projects.
(4) A requirement on Mr Shepherd to report on progress to the project manager at regular intervals and subject finished work to testing by the quality assurance team.
(5) The place of work would be at the Cardiff offices of Gerling NCM with a provision to work occasionally from home with prior agreement of the project manager
(6) The hours would be 36 hours per week Monday to Friday with a requirement to work the core hours of 9:30 am to 11:30am and 2:00pm to 3:30pm. Mr Shepherd would have a discretion on start and finish times outside the core hours.
(7) The fee for the work would be expressed at an hourly rate with the figure for 36 hours. The fee would be payable weekly in arrears by bank transfer and on production of an authorised completed time sheet for the week.
(8) The hourly fee rate would be significantly higher than a permanent employee in a similar position.
(9) Overtime and working at weekends would require specific authorisation of the project manager. The fee rate for overtime and weekend working would be at the same rate as for the 36 hours.
(10) Any leave taken during the term of the contract would require prior authorisation of the project manager.
(11) An obligation on Mr Shepherd to inform the project manager of his inability to attend work through illness or other exceptional reason.
(12) The equipment necessary to do the job would be provided by Gerling NCM.
(13) A term prohibiting Mr Shepherd from taking on other work during the term of the contract except with the consent of Gerling NCM. The consent could not be unreasonably withheld.
(14) Written notice of 4 weeks from either party would be required to terminate the contract early. There would be a residual clause permitting Gerling NCM to terminate the contract unilaterally in defined exceptional circumstances.
(15) No entitlement to paid leave or sickness benefit.
(16) Not eligible to be a member of the pension scheme.
(17) A clause to the effect that the parties did not intend to create an employment relationship
"As it seems to me the present state of the law is that whether a relationship is an employment or not requires an evaluation of all of the circumstances. In the words of Hart J in Synaptek Ltd v Young [2003] STC 543, 75 TC 51, paragraph 12, the context is one 'where the answer to be given depends on the relative weight to be given to a number of potentially conflicting indicia'. The presence of a substitution clause is an indicium which points towards self-employment, and if the clause is as far-reaching as the one in Tanton it may be determinative by itself. In this case, however, if, contrary to my view, the hypothetical direct contract between Mr Hood and ABB has to be assumed to have contained a substitution clause similar to that in the Usetech/NES contract, in my opinion (agreeing with the Special Commissioner) it would not be sufficient to override the effect of all the other considerations which led the Commissioner to decide that the relationship would have been that of employee and employer.
"In those circumstances, of course the terms of any contract between the agency and the client as a result of which the service contractor will be present at the site are important, as would be the terms of any contract between the service contractor and the agency. But, particularly given the fact that, at any rate at present, a contract on standard terms may or may not be imposed by an agency, or may be applicable not by reference to a particular assignment, but on an ongoing basis, and may actually bear no relationship to the (non-contractual) interface between the client and the service contractor, such documents can only form a part, albeit obviously an important part, of the picture."
(1) Mutuality was satisfied by the obligations upon Mr Shepherd to perform the services of an IT specialist and upon Gerling NCM to pay him for those services throughout the period of the fixed term contracts.
(2) Mr Shepherd was obliged to provide his services personally and exclusively during the hours contracted.
(3) Gerling NCM was required to provide work of 36 hours per week under the contracts which could only be terminated early by four weeks notice or on exceptional grounds.
(4) Gerling NCM had the right to assign Mr Shepherd to specific work projects and teams, and require him to report on progress and submit his work for checking by quality assurance team. Mr Shepherd was obliged to attend the offices of Gerling NCM during specified hours. The controls exercised over Mr Shepherd were the same as those for Gerling's employees and consistent with a contract of service.
(5) The obligation upon Mr Shepherd to obtain prior authorisation for extra hours and absence, and the obligation upon Gerling NCM to provide equipment indicated a contract of service.
(6) No employee benefits was, in my view neutral, particularly as Mr Shepherd's fee, twice the payment rate for an equivalent member of staff, provided him with more than adequate compensation for the loss of benefits.
(7) I placed no weight on the term that the parties did not intend to create an employment relationship. This intention was not reflected in the other terms found for the hypothetical contract or in the actual work arrangements for Mr Shepherd which were similar if not the same for a Gerling employee doing equivalent work.
Decision
MICHAEL TILDESLEY OBE
SPECIAL COMMISSIONER
RELEASE DATE: 19 May 2008
LON/
Authorities referred to in skeletons and bundles but not referred to in the decision:
Airfix Footwear Ltd v Cope [1978] IRLR 396
Ansell Computer Services Ltd v Richardson (Inspector of Taxes) [2004] STC (SCD) 472.
Datagate Services v HMRC [2007] SPC 00656
Davies v Braithwaite [1931] 2KB 628
Esterson, R v Revenue and Customs [2005] EWHC 3037 (Admin)
Ferguson v John Dawson [1976] IRLR 346
Future Online v Foulds [2004] 76 TC 590
Island Consultants Ltd v The Commissioners for HMRC [2007] SPC 00618
Global Plant Ltd v Secretary of State for Health and Social Security [1972] 1 QB 139 [1971] 3 All ER 385.
Lime-IT Ltd v Justin (Officer of the Board of Inland Revenue) [2003] STC (SCD) 15
Massey v Crown Life Insurance Co [1978] 1 WLR 676, [1978] ICR 590, [1978] 2 All ER 576, [1978] IRLR 31, CA.
McManus v Griffiths (Inspector of Taxes) [1997] STC 1089, 70 TC 218
Morren v Swinton and Pendlebury Borough Council [1965] 2 All ER 349
MKM Computing Ltd v HMRC [2007] SPC 00653
Netherlane Limited v Simon York [2004] SPC00457
Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612, [1984] IRLR 240, CA.
Prater v Cornwall County Council [2006] 2 AllER 1013
WHPT Housing Association Limited v The Secretary of State for Social Services
1981 Unreported SJ/465/80
Young v Woods [1980] IRLR 201