Case No: C1/2011/0196

Neutral Citation Number: [2011] EWCA Civ 1203
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISON
ADMINISTRATIVE COURT
THE HONOURABLE MR JUSTICE KEITH

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 26/10/2011
Before :

THE RIGHT HONOURABLE LORD JUSTICE LONGMORE
THE RIGHT HONOURABLE LORD JUSTICE RIMER
and
THE HONOURABLE MR JUSTICE WARREN
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Between :

	THE CONSTRUCTION INDUSTRY TRAINING BOARD
(AKA CITB-CONSTRUCTION SKILLS) 	Respondent	
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	BEACON ROOFING LIMITED	Appellant	

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(Transcript of the Handed Down Judgment of
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Mr Jolyon Maugham (instructed by Michael Welch & Co) for the Appellant
Mr Patrick Green & Ms Elizabeth Humphreys (instructed by Legal Department of the CITB) for the Respondent

Hearing date : 10th October 2011
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Judgment
Lord Justice Longmore: 
Introduction
1.	The respondent to this appeal, which I shall call “the Board”, provides training for those working in the construction industry.  In order to fund the provision of that training, it imposes a levy on employers in the industry.  It has imposed such a levy on the appellant, Beacon Roofing Ltd ("Beacon"), over a number of years.  However, in 2007 Beacon changed the way it engaged some of its workforce, and it then challenged the levy which the Board subsequently imposed.  The question which this appeal raises is whether Beacon is still liable for the levy in respect of those members of its workforce or whether, as the employment tribunal has held, the change has resulted in Beacon no longer being liable for the levy.
The material facts
2.	These can be elicited from the decision of the employment tribunal.  Beacon is a roofing contractor. It employs two contract managers and some office staff, but its roofing operatives (as tilers are now apparently called) have always been self-employed sub-contractors.  The fact that Beacon's roofing operatives have been self-employed meant that the Construction Industry Scheme ("the Scheme") governed the manner in which Beacon paid them. Although tax continued to be deducted at source, it was deducted at a flat rate of 20%, and there were more generous allowances for expenses than under the PAYE scheme.  However, complying with the requirements of the Scheme involved a considerable amount of paperwork, the maintenance of records and the remission of tax and National Insurance contributions to the Revenue, and there was also the ever present risk of a dispute with the Revenue over the status of its roofing operatives.  These factors led Beacon to enlist the services of Hudson Contract Services Ltd ("Hudson"). 
3.	Beacon's contract with Hudson in respect of those services is dated 21 February 2007.  Within six weeks after entering into the contract with Hudson about 28 workers previously engaged directly by the appellant signed contracts with Hudson and their services were supplied by Hudson to Beacon.  Since then, Hudson has engaged 95 workers and provided their services to the appellant under the contract.
4.	The contract did not alter the way Beacon recruited its roofing operatives nor the levels of pay which its operatives received nor the work which they did: Beacon continued to recruit its operatives itself, to agree with them the terms on which they were to be engaged and to assign them their work.  What the contract did was to enable Hudson to engage Beacon's operatives (thereby making Hudson responsible for complying with the requirements of the Scheme) and to provide the services of the operatives to Beacon (see para 10 of the Employment Tribunal’s decision).  The way it worked was that Beacon would induce its operatives to sign an agreement with Hudson on Hudson's standard terms under which the operatives would be engaged by Hudson to supply their labour to Beacon.  Those operatives would be paid by Hudson what they would have been paid by Beacon had they been engaged by Beacon following their recruitment.  Beacon would reimburse Hudson for those payments, but, since Hudson was not to be treated as providing credit to Beacon, Hudson would only pay the operatives if Beacon provided the appropriate funds to Hudson "on the same day and at the same instant" as Hudson paid each operative.  In this way, Beacon was relieved of the administrative and clerical work involved in complying with the requirements of the Scheme, as well as the risk of an adverse finding about the employment status of the operatives, though Beacon retained responsibility for insuring the operatives which Hudson engaged, and for complying with health and safety legislation.  The amount which Beacon had to pay to Hudson for assuming the responsibilities was £15.00 per operative per week plus VAT, in addition to the amounts reimbursed to Hudson in respect of the payment made to each operative. 
5.	The contract made between Hudson and Beacon contained a note on the front page stating:-
“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.”
6.	On 20 April 2009, the Board issued the relevant levy assessment notice to Beacon.  The notice required Beacon to pay a levy of £18,446.00 by 20 May 2009.  Part of the levy – £3,235.00 – was 0.5% of the sums paid to employees on its own payroll, presumably its managers and office staff.  The rest of the levy – £15,211.00 – was 1.5% of the sums paid to Beacon's "self-employed workers or sub-contractors for labour only", i.e. its roofing operatives. 
7.	Beacon appealed against the latter element of the assessment to an employment tribunal pursuant to section 12(4) of the Industrial Training Act 1982 ("the Act").  The burden of proving that it was not liable for that part of the levy was on Beacon because section 12(5)(a) of the Act provided, so far as is material: 
"… 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
8.	The Board is one of a number of industrial training boards established by the Secretary of State under section 1(1) of the Act "for the purpose of making better provision for the training of persons over compulsory school age … for employment in any activities of industry or commerce".  The Board's power to impose levies is derived from a levy order made by the Secretary of State pursuant to sections 11(1) and 11(2) of the Act.  The levy assessment notice to which this appeal relates was issued pursuant to a levy order made by the Secretary of State on 3 March 2009.  That order was the Industrial Training Levy (Construction Industry Training Board) Order 2009 ("the 2009 Order").  It required "employers in the construction industry" to pay various levies based on a percentage of the total payments they had made to their workforce.  Whether Beacon had to pay a levy in respect of those of its operatives whose services had been supplied to it by Hudson turned on the proper interpretation of the phrase "labour-only agreements" which appears in Art 8(1) of the 2009 Order.  Art 8 is headed "Assessment of amount of levy", and Art 8(1)B provides, so far as is material:- 
"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
9.	The tribunal acknowledged that services, i.e. the labour of the operatives, were provided by Hudson to Beacon under the contract, and in the last sentence of para 24 of its determination, equated the purpose of the contract between Beacon and Hudson with the reason why Beacon entered the contract.  Its findings on why Beacon had entered the contract were set out in paras 25-26 of its judgment, which read as follows:- 
"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. 
Judgment
10.	Keith J held that the tribunal had made an error of law because “the reason why a party enters into a contract is not necessarily the purpose of the contract”.  That did not mean that the parties’ subjective intentions had no part to play in ascertaining the purpose of the contract but he held
“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.
The submissions
11.	Mr Jolyon Maugham for Beacon submitted:-
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 [1967] 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.
12.	Mr Patrick Green submitted:-
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.
Discussion
13.	As long ago as 1966, Lord Denning MR said that the system of “labour only” subcontracting had come under much discussion, see Emerald Construction v Lowthian [1966] 1 WLR 691, 697F.  A labour only agreement, whether in general parlance or as defined in the 2009 order, is a legal genus of which labour only subcontracting is a species.  It is well-known that such contracts have from time to time given rise to difficulties in the employment field (see Chitty, Contracts 30th ed. Vol 2 para 39-028) but it would perhaps be surprising if the precise manner, in which companies in the construction industry secured the services of their operatives, should be critical in determining whether the levy contemplated by the 1982 Act should be applicable.
14.	The difficulty with the tribunal’s analysis is that any bilateral contract is by definition made by two parties who may have entirely different (and indeed opposing) reasons for entering into the contract.  It cannot, therefore, be right to equate the “purpose” of a contract with the reason or reasons why the parties entered into the contract in the first place, let alone (as the employment tribunal seems to have thought) the reasons why Beacon (as opposed to Hudson) entered into the contract.  “Purpose” can, no doubt have the meaning of “reason” or “intent” if one looks at one person only (although the judgment of Romer LJ in Re Nicholson & Son’s Application [1931] 2 Ch. 157, shows that that is not necessarily always true); but the definition of the “purpose” of any bilateral arrangement cannot to my mind be determined by an inquiry into the parties’ subjective intentions, let alone the subjective intention of only one of them.
15.	In a case such as the present, where there is no difficulty in determining the meaning of the contract, it is unnecessary to have regard to the recent plethora of case law on construction of contracts save to say that the meaning of any contract has to be ascertained against the relevant background.  The relevant background is, no doubt, also important if it becomes necessary to ascertain the purpose of a contract.  But the existence of that background will not necessarily govern the essential purpose of a contract.  This is particularly important if part of the background is an earlier contract.  The reason why a person makes a new contract is no doubt that it is in some ways dissatisfied with the old contract but the new contract may still have a main purpose which is different from the reason why the new contract was made.
16.	It follows therefore that, in seeking to discover the reason why Beacon had entered the contract, the Tribunal asked itself the wrong question and thus erred in the law by departing from the statutory wording.  The judge was therefore entitled (and bound) so to hold and, if appropriate, answer the right question; namely what was the sole or main purpose of the contract pursuant to which Beacon agreed to pay for Hudson’s services.
17.	It seems to me that, if one stands back from the reasons why parties have made a contract and asks oneself what was the purpose of that contract, the inquiry must focus essentially on the terms of the contract and must, therefore, be an objective inquiry.  The 2009 Order cannot contemplate that parties to a labour only agreement would give evidence about their state of mind when they made the contract and it must follow not merely that speculation about their reasons is inapposite but that the purpose of the contract must be ascertained primarily from its terms while taking into account any relevant background.
18.	The relevant background in the present case is, as found by the tribunal, that there was a previous arrangement pursuant to which Beacon contracted directly with their roofing operatives, albeit supposedly as sub-contractors, but decided for a number of mainly administrative reasons that they wanted a different arrangement pursuant to which Hudson (rather than Beacon) would make contracts with the roofing operatives and provide what the Tribunal had earlier described (para 10) as Hudson’s service to companies in the construction industry which involved Hudson taking on the relevant workers
“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.
19.	As far as the terms of the contract are concerned, it is true to say that Hudson’s obligation to provide Beacon with the operatives’ services is not over-emphasised but it is stated in terms in clause 15 and is necessarily implicit in both the initial “Note” and clause 1.
20.	For these reasons I do not find any assistance in those tax cases where the court had to ascertain the object of a transaction particularly cases such as IRC v Brebner in which section 28 of the Finance Act 1960 applied to a person who obtained a tax advantage unless that person showed that
“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.
21.	I therefore conclude that the main purpose of the contract between Beacon and Hudson is to be objectively determined by reference to the terms of the contract and the relevant background.
22.	Once one asks oneself that objective question it seems to me that the main purpose of the contract was for Hudson to supply Beacon with the services of the roofing operatives who were going to perform the work which Beacon contracted with their customers to do.  Without such operatives, Beacon could not begin to perform its contractual obligations to its customers which were the very reason for its existence as a construction company, as (indeed) their name indicates.  They needed roofing operatives in order to perform the object for which they were incorporated.  If they were not going to contract with them directly, they would have to contract for them to be supplied by some company such as Hudson.  No doubt part of the attractiveness of the package offered by Hudson was Hudson’s willingness to deal with P.A.Y.E., National Insurance, etc and to provide a shield from any awkward inquiries from the revenue authorities.  That may indeed be the reason why Beacon made the new arrangement with Hudson rather than continue themselves contracting with the operatives.  But the main purpose of the contract was to make roofing operatives available to Beacon in order to enable Beacon to continue its roofing business.  The rest was icing on the cake, or as the judge put it in para 18 of his judgment, “ancillary services”.
23.	The tribunal called the package of administrative services “substantial” and then asked itself whether Beacon was paying for those services or the provision of labour.  It answered that question by saying the payment was for “the additional services” and the labour element was incidental; but as the judge pointed out Beacon in fact paid much larger sums for the provision of the operatives (their full weekly earnings) than the £15.00 per operative for the ancillary services.
Conclusion
24.	Since the tribunal asked itself the wrong question, the findings of fact made in answering that question cannot be decisive.  The judge asked himself the right question and was able to answer it in the light of the primary findings of fact made by the tribunal and was able further to say (para 19) that it was the only conclusion open to the tribunal on the primary facts which it found; the answer which the judge gave was that the main purpose of the contract between Beacon and Hudson was the provision to Beacon of the services of the operatives which it had recruited.  I agree that that was the only conclusion properly open to the tribunal and would dismiss this appeal.
Costs
25.	The parties have now exchanged costs schedules; any objection to the respondents’ schedule should be the subject of written submissions before hand down.
Lord Justice Rimer:
26.	I agree.
Mr Justice Warren:
27.	I also agree.