ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISON
THE HONOURABLE MR JUSTICE KEITH
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE RIMER
THE HONOURABLE MR JUSTICE WARREN
| THE CONSTRUCTION INDUSTRY TRAINING BOARD
(AKA CITB-CONSTRUCTION SKILLS)
|- and -
|BEACON ROOFING LIMITED
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
Mr Patrick Green & Ms Elizabeth Humphreys (instructed by Legal Department of the CITB) for the Respondent
Hearing date : 10th October 2011
Crown Copyright ©
Lord Justice Longmore:
The material facts
"Hudson Contract Services Limited are providers of a specific service to companies in the construction industry, Hudson undertakes to contract with labour that you select on your behalf. We will accept responsibility for HMRC compliance matters, status enquiries and claims for holiday pay, statutory sick pay, etc. We will pay operatives the exact sum agreed and confirmed by our clients on a weekly basis".
The contract then relevantly provided:-
"1. The following are the terms and conditions pursuant to which Hudson Contract Services Limited ("Hudson") undertakes to contract with individuals (the "Operatives") the labour of whom the Client shall require for use in the course of its business.
2. The service to be provided by Hudson is that of acting as an engager of such Operatives as the Client may select …
5. The client undertakes to … orally explain to the Operative prior to that contract being signed that his contract is not with the Client but with Hudson
13. Hudson agrees … to comply with all relevant tax, national insurance and employment law costs and burdens which in consequence of it engaging the Operatives fall upon it rather than upon the Client …
14. Hudson require receipt of funds from the total payroll transaction value of the same day and at the same instant that payments are agreed to reach each Operative. Hudson cannot give credit to the Client …
15. The Client hereby undertakes to indemnify Hudson against the cost of making such payments to Operatives as are notified to Hudson under clause 3(iv) and any statutory obligations arising in consequence of those payments or it supplying those Operatives to the Client. However, so long as the Client complies with its obligations under this contract and all reasonable requests for information and assistance in connection with Hudson's obligations under the Operative Contracts, this indemnity does not extend to the consequences of a finding by a court or tribunal that an operative is employed by Hudson or the Client and the risk of such a finding shall be borne by Hudson."
"… if the appellant satisfies the tribunal that [it] ought not to have been assessed to the levy or ought to have been assessed in a smaller amount, the tribunal shall rescind or, as the case may be, reduce the assessment but … in any other case shall confirm it."
Beacon contended that it was not liable to pay a levy at all for those operatives whose services had been provided to it by Hudson. Alternatively, it argued that if it was liable to pay a levy for those operatives, the levy should have been calculated at the rate of 0.5%, not 1.5%, though that contention was not pursued at the hearing of the appeal. The employment tribunal (sitting at London South) held that Beacon was not liable to pay a levy at all for those operatives and allowed Beacon's appeal. The Board appealed to the High Court pursuant to section 11(1) of the Tribunals and Inquiries Act 1992 on the basis that the tribunal had erred in law in so holding. Keith J held that they had and upheld the levy. Now there is an appeal to this court.
The statutory framework
"The amount of levy to be assessed in respect of each construction establishment is … an amount equal to 1.5% of all payments (excluding payments in respect of the provision of materials and any other payments which are not in respect of the provision of services) made to persons during the relevant base period under labour-only agreements in respect of work carried out at or from the establishment …"
A "labour-only agreement" is defined in Art 2(1)(h) of the 2009 Order as meaning:-
"… any agreement or arrangement (other than contracts of service or contracts of apprenticeship) between an employer and any other person, the purpose of which is wholly or mainly the provision of services (not including professional services) of such a person or any other person to the employer in his trade or business".
The reasoning of the tribunal
"25. The Tribunal is satisfied that [Beacon] did not enter into the Contract because it wanted Hudson to supply the services of the workers. [Beacon] still sourced its own labour even after the contract was entered into. All that has happened is that Hudson has been interposed between [Beacon] and its workers for administrative reasons. Without the benefits such as administration of payroll, revenue queries etc as set out above, it is clear that [Beacon] would have continued to engage the workers directly rather than pay an extra £15 per week. There is no evidence that (and the respondent [the Board] does not appear to contend that) the contract between [Beacon] and Hudson in any way promotes, facilitates or assists in the provision of services of the workers to Beacon.
26. The Tribunal finds that the reason or purpose that the contract was entered into by [Beacon] with Hudson, was not for the provision of services but was for the other aspects of the contract such as administration of payroll etc as set out above. The Tribunal asked itself first whether the reason for the contract between [Beacon] and Hudson was so that [Hudson] could source labour. The answer was no. [Beacon] still sourced its own labour. The Tribunal then asked itself what the contract between [Beacon] and Hudson offered in addition to the labour element. The Tribunal finds that it offered a substantial package of services as set out above. Finally the Tribunal asked itself whether it was those services that [Beacon] was paying for, or the provision of labour. The answer is the additional services. The labour element was incidental … [it was] the effect of the contract between the parties."
In other words, the Tribunal found that Beacon had entered the contract with Hudson so that it would be relieved of the administrative and clerical work involved in complying with the requirements of the Scheme, and since that had been the reason why Beacon had made the contract with Hudson, that was the main purpose of the contract.
"Beacon's subjective intention in entering the contract with Hudson was to obtain the services of its operatives without having to engage then directly, and Hudson's subjective intention in entering the contract with Beacon was to provide the services of those operatives at no cost to itself but for a fee to reflect the ancillary services it was providing to Beacon. On any view, therefore, the main purpose of the contract was to enable Hudson to provide the services of those operatives to Beacon."
Mummery LJ has given permission for a second appeal to this court.
i) the purpose of a contract was synonymous with the intention of the parties in making the contract which was itself the reason why the parties made the contract. He relied on tax cases such as IRC v Brebner  2 AC 18 where the court was required to ascertain whether the main object (or one of the main objects) of a relevant transaction was to enable a tax advantage to be obtained. In ascertaining that object it was necessary to discover the taxpayer's reason for entering the transaction;
ii) the tribunal had found as a fact that the reason for or the purpose of entering the contract was not the provision of services but the other aspect of the contract namely taking over the administrative obligations which they had earlier set out;
iii) to the extent (if at all) that the purpose of a contract was to be objectively ascertained, it still followed from the tribunal's findings that the purpose of the contract was the provision by Hudson of the administrative know-how it had in relation to tax, National Insurance, etc and the taking over of the paperwork in relation to these matters.
i) the purpose of a contract was an objective matter and could not be ascertained by discovering the reasons why parties had entered into a contract (let alone, as the tribunal appears to have decided in para 24 of their determination, the reason why Beacon alone had entered into the contract);
ii) the findings of the tribunal in relation to the reasons why Beacon had entered into the contract were, therefore, irrelevant;
iii) those findings obscured the real purpose of the contract which was, fundamentally, that Beacon were no longer themselves going to "employ" or themselves contract for the services of their operatives (if that was the right analysis of the previous arrangement) but instead were going to be provided by Hudson with the services of those operatives who would themselves be paid by Hudson, albeit with a re-imbursement of the same so paid together with a (comparatively small) sum for the services which Hudson provided.
"and then supplying the services of those workers to the client."
This neatly encapsulates the purpose (or at any rate the main purpose) of the contract between Hudson and Beacon and it is somewhat ironic that in the later paragraphs of their decision the tribunal allow themselves to be sidetracked into ascertaining why Beacon made this new contract.
"the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments and that none of them had as their main object or one of their main objects, to enable tax advantages to be obtained."
No doubt "object" can sometimes be equated with "purpose" and vice versa, but the whole context of the statutory provision required the court to look into the mind of the taxpayer to ascertain whether he entered any particular transaction to obtain a tax advantage or merely for "bona fide" commercial reasons. If the transaction was constituted by or included a contract, it was self-evidently necessary to consider the motives of the taxpayer. The 2009 Order necessitates no such inquiry but only an objective inquiry into the purpose of the contract which, as I have said, is to be ascertained from the relevant background and the terms of the contract.
Lord Justice Rimer:
Mr Justice Warren: