England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
(MR KENNETH PARKER QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		24th February 2009

Lord Justice Moses:

1. The decision impugned before Mr Kenneth Parker QC, sitting as a deputy High Court judge, was a decision of the Revenue contained in a letter dated 8 December 2006. This required that the appellant, Oriel Support Ltd ("Oriel"), should remit PAYE due for each of its customers under what the Revenue described as "consultancies", under individual PAYE references for each consultancy and not under its own PAYE reference. Mr Kenneth Parker QC, in a judgment reported at [2008] EWHC 1304 Admin, upheld the decision and declined to accept the challenge advanced by Oriel that the Revenue had no statutory authority for making such a requirement. The reason why Oriel sought to use its own reference is not a reason which illuminates the correctness or otherwise of Mr Parker's decision but I observe that it was hoped to offset withholdings made by a number of end users from payments made to Oriel.
2. The background of the argument has been carefully and fully explained by the deputy High Court judge. The judge explains that labour providers are in the business of providing workers to end users, who will use such workers either in the long or short term in their own operations. The appellant, Oriel, provides a complete financial outsourcing for labour providers who are the clients of Oriel. Amongst the services provided by Oriel under a complete financial outsourcing contract is the processing of pay for each worker, with deductions of tax and the employee's National Insurance contributions. It is in those circumstances that Oriel contend it is entitled to use its own reference number.
3. It is important to observe that the labour provider is the only body which enters into contracts with the workers whose labour will be made available to the end users through the labour provider. The labour provider contracts with end users for the supply to them of the labour of those workers under contract to the labour provider. The workers themselves enter into a contract to provide their personal services to the labour provider. They do so in two ways: either they provide those services under contracts of employment or they provide them by virtue of an agency arrangement.
4. It is in that context that the judge -- in my judgment accurately -- identifies how the wages and the deductions are made. At paragraph 47 he emphasises that the payments of wages to the workers are at the expense of the labour provider. Under invoicing arrangements between Oriel and the labour provider, Oriel recharges to the labour provider the expense of payments made by Oriel to the employees of the labour provider so that, as the judge puts it, in the final analysis the labour provider "bears the cost of the payments to its employees". The precise mechanism, for anyone who is interested, is set out in full in paragraph 47 of his judgment.
5. It is in that factual context, as to which there is no dispute, that it is necessary to turn to the relevant statutory and regulatory provisions. By section 4 of the Income Tax Earnings and Pensions Act 2003 ("the 2003 Act"), under the rubric "'Employment' for the purposes of the employment income Parts":

"(1) In the employment income Parts "employment" includes in particular –

(a) any employment under a contract of service,

…

(2) In those Parts "employed", "employee" and "employer" have corresponding meanings."

6. Some of the workers providing personal services to the labour provider who the labour provider supplied to end users, work under a contract of service and are thus employees within the meaning of section 4 of the 2003 Act. But not all the workers work under a contract of service as provided within section 4. Some workers fall within the provisions of section 44 of the 2003 Act, which provides, under the rubric "Treatment of workers supplied by agencies":

"(1) This section applies if --

(a) an individual ("the worker") personally provides, or is under an obligation personally to provide, services (which are not excluded services) to another person ("the client"),

(b) the services are supplied by or through a third person ("the agency") under the terms of an agency contract,

(c) the worker is subject to (or to the right of) supervision, direction or control as to the manner in which the services are provided, and

(d) remuneration receivable under or in consequence of the agency contract does not constitute employment income of the worker apart from this Chapter.

(2) If this section applies --

(a) the services which the worker provides, or is obliged to provide, to the client under the agency contract are to be treated for income tax purposes as duties of an employment held by the worker with the agency, and

(b) all remuneration receivable under or in consequence of the agency contract (including remuneration which the client pays or provides in relation to the services) is to be treated for income tax purposes as earnings from that employment."

Section 47 is an interpretation section which provides, by subsection (1), that:

"agency contract" means a contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client."

In the instant appeal, there is no dispute but that the worker personally provides, or is under an obligation personally to provide, services to the end user and that the services are supplied through a third person under the terms of an agency contract, namely the labour provider.

7. The relevance of those provisions to the payment of PAYE income can be seen in the provisions of the regulations made under the Act, the Income Tax (Pay As You Earn) Regulations 2003/2682 ("the 2003 Regulations") By Regulation 21(1):

"On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with these Regulations by reference to the employee's code, if the employer has one for the employee."

Subsection (2):

"The employer must deduct or repay tax by reference to the employee's code, even if the code is the subject of an objection or appeal".

Regulation 4 defines relevant payments, and there is no dispute but that the payments in the instant appeal are payments of PAYE income: see regulation 4(1).

8. Employment is defined in Regulation 2, which provides:

"'employment'" subject to regulations 10 to 12, has the meaning given in sections 4 and 5 of ITEPA; and 'employer' and 'employee' have corresponding meanings;"

9. It is necessary therefore to turn to Regulation 10, which deals with agencies of the nature of the labour providers in the instant appeal. By Regulation 10, under the rubric "Application to agencies and agency workers":

"(1) For the purposes of these Regulations --

(a) agencies are treated as employers; and

(b) agency workers are treated as employees."

By Regulation 2, the interpretation regulation, "agency" and "agency worker" have the meaning given in section 44 of the 2003 Act to which I have already referred.

10. Pausing there, were the case to finish at that point it is plain that the labour providers are to be treated as employers by virtue of Regulation 10, read with Regulation 2, in deciding whether an obligation is imposed upon those labour providers by Regulation 21.
11. Accordingly, the labour providers are required to deduct tax by reference to their employee's code and, by virtue of the provisions to which I have referred, the workers are their employees.
12. But we cannot stop there. In the courageous arguments of Mr Walters QC on behalf of the taxpayer, he says that that is not an appropriate halting point. The judge disagreed, and in succinct paragraphs of his judgment, identifies the applicable sections and in three paragraphs concludes, as I have concluded, that the labour provider is under an obligation to deduct tax from payments made to the workers. However, the argument Mr Walters advanced before the judge, and has persisted in advancing before us, is that Oriel falls within the definition contained in Regulation 2 of "other payer" and the workers fall within the definition of "other payee". That issue is of importance since, by virtue of "Regulation 12", under the heading "Application to other payers and other payees":

"(1) For the purposes of these Regulations --

(a) other payers are treated as employers;

(b) other payees are treated as employees; and

(c) an other payee's 'employment' with an other payer starts when relevant payments start and ends when relevant payments end."

13. This appeal therefore turns on the success or otherwise of Mr Walters QC maintaining that Oriel is an "other payer" and the workers, which it undoubtedly pays, are "other payees". "Other payer" is defined in Regulation 2 as follows:

"'Other payer' means a person making relevant payments in a capacity other than employer, agency or pension payer and 'other payee' means a person receiving relevant payments in a capacity other than employee, agency worker or pensioner"

14. Mr Walter contends that "other payee" is the mirror of "other payer". A payment made by someone to a worker cannot be made by someone who is an "other payer" unless the recipient is an "other payee". He has, fairly, accepted that the one concept within the regulation is the mirror of the other.
15. The appeal therefore turns upon whether the worker is a person receiving relevant payments in a capacity other than employee. Mr Walters points out that the payments made to the workers by Oriel are payments made out of its own funds. It receives money from the end user, then uses that money to pay the labour provider's workers and then accounts to the labour provider what is left after deducting its fees, the payments made to the workers and importantly the tax due on those payments. He therefore contends that the recipient worker does receive those payments in a capacity other than employee because that worker is not an employee of Oriel. Crucially, within Regulation 2, what one has to ask is the question whether the payments to the workers are made by an employer of that worker and that the worker therefore receives those payments other than as an employee of the person from whom he receives payment. That argument is an argument which he expands in detailed, if not dense, written argument, in for example his skeleton argument, in which he says, at paragraph 34:

"…the worker [receiving the payment] is entitled, as against [the labour provider] to receive an amount equal to the amount of the relevant payment which he in fact receives from [Oriel]. The worker is so entitled in his capacity as employee of the [labour provider]. However the capacity in which the worker receives the relevant payment from Oriel has nothing to do with the capacity in which he is entitled as against [the labour provider] to receive an equivalent amount."

He emphasises later on that "receipt"and "entitlement" are -- especially in the context of the PAYE Regulations -- entirely separate concepts.

16. A cohesive, comprehensible and exhaustive system of PAYE requires, so Mr Walters submits, that the focus should be upon the person making the payment out of his own funds. He is the target for the liability to deduct the tax and thus it is that "other payer" and "other payee" mean either an employer or an employee of the person actually making the payment.
17. The judge refused to accept that argument on the plain words of the Regulation. I agree with the judge. Regulation 12 as interpreted in the lexicon in Regulation 2, requires the Revenue to look at the capacity in which the payment is received. It is plain beyond all argument that the worker receives those payments in his capacity as employee and not in his capacity other than employee. He receives those payments under his contract of employment: see the definition of employment in Regulation 2(1). It would be otherwise, as was canvassed by the judge in paragraph 37 of his judgment, if some other person made a payment (for example a bonus), otherwise than under a contract of employment. The example given by the Revenue is of a bonus paid by a manufacturer of a particular type of motor car to an employee working within a dealership. Such a payment is not received under the contract of employment but clearly it is taxable since its source is employment. Hence the need for references to "other payer" and "other payee" in Regulation 2.
18. No such difficulty arises here. When Oriel pays the labour providers' workers it discharges the labour provider's obligation to pay its workers whose personal services are provided to the end users under the worker's contract of employment with the labour provider. It is, as the judge pointed out, as simple as that. Such a position is reflected in Section 687 of the 2003 Act, which provides:

"(1) If any payment of, or on account of, PAYE income of an employee is made by an intermediary of the employer, the employer is to be treated, for the purposes of PAYE regulations, as making a payment of the income of an amount equal to the amount given by subsection (3).

…

(4) For the purposes of this section a payment of, or on account of, PAYE income of an employee is made by an intermediary of the employer if it is made --

(a) by a person acting on behalf of the employer and at the expense of the employer or a person connected with the employer,"

19. In the instant case, where Oriel make a payment, it does so, as Mr Walters accepted, as an intermediary on behalf of the labour provider. The payment therefore is to be treated, for the purposes of PAYE, as a payment of income by the labour provider, but the labour provider is not required to deduct tax and account for it by virtue of the operation of section 710, which I need not read into the judgment, and the operation of 687(2). The payment by Oriel, the intermediary, discharges the liability of the labour provider, but it is important to note that section 687 does not expand the definition of employer on whom the liability to deduct tax is placed; it merely enables machinery for an intermediary such as Oriel to discharge the liability of the labour provider.
20. The judge explained that solution to the problem raised by the taxpayer in the instant case with more succinct words than mine. I should therefore have followed the advice of Mummery LJ in R(Balding) v SSWP [2008] 1 WLR 564 at paragraph 24:

"that there is no point in appeal court judges saying things at length simply for the sake of saying something."

21. For those reasons I will dismiss the appeal.

Lord Justice Keene:

22. I agree.

Sir Anthony Clarke:

23. I also agree.

Order: Appeal dismissed