England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		7 November 2007

1. This is a claim by Hudson Contract Services Limited ("Hudson"), the Claimant, for repayment from HM Commissioners of Revenue & Customs ("the Revenue"), the Defendant, of £560,000 plus interest in respect of income tax and national insurance liabilities ("NICs") for Workers in the building industry. The Claims are brought under what is sometimes called the Rule in Woolwich Equitable Building Society [1993] AC 70 ("Woolwich") and Regulation 52 of the Social Security (Contributions) Regulations 2001/1004. The formidable list of legal issues set out in the pleadings and skeleton arguments has been reduced and refined in the course of the trial which took place between 1 and 8 October 2007. I will deal in turn with the tax and national insurance regimes, the facts, the relevant questions of law, the parties' submissions and the court's conclusions.
2. I first summarise the regimes at some length as Counsel have placed some emphasis on the detail although , as the hearing developed, it seemed to me that the central issues did not much turn on the detail of the legislation. The regimes are helpfully set out in the skeleton argument produced by Mr Jones QC for the Revenue and I now reproduce this with some minor corrections helpfully put forward by Mr Maugham for Hudson and with some compression of my own.

The Regimes-Employees

3. Tax under Schedule E was charged on emoluments in respect of any office or employment: s.19(1) Income and Corporation Taxes Act 1988 ("ICTA"). From the tax year 2003-4 provisions of ICTA were replaced to substantially the same effect by Income Tax (Earnings and Pensions) Act 2003.
4. S.203(1) ICTA provided that on the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax had to be deducted or repaid by the person making the payment, subject to and in accordance with regulations made by the Revenue ("Pay As You Earn" or "PAYE"). The regulations were to make provision for the person making the payment to make deductions in accordance with tax tables prepared by the Revenue: s.203(2)(a) ICTA. These tax tables had to be constructed with a view to securing so far as possible that the total income tax estimated to be payable in respect of any income assessable under Schedule E for any year of assessment (subject to a provisional deduction for allowances and reliefs) was deducted from such income paid during that year: s.203(6), (7) ICTA.
5. The general rule was that every person who was chargeable to income tax was required to give notice to the Revenue of that fact and if so required to make a return containing such information as might be required by the Revenue, including a self assessment of the amounts chargeable to income tax due: S.7(1), 8(1), s.9(1) TMA 1970. However, in summary, no such notice or return was required if all payments of income tax were taken into account through the PAYE system or the person concerned was a basic rate tax payer subject to PAYE on employment emoluments and the only other assessable income was bank or building society interest subject to deduction and dividends subject to deductions at the ordinary rate.
6. The relevant regulations made by the Revenue pursuant to s.203 ICTA in relation to employees were, at the time with which the present case is concerned, the Income Tax (Employments) Regulations 1993 ("ITER").
7. Regulation 6 ITER required every employer on making a payment to any employee during the year to deduct from the employee's gross pay (or repay to the employee, as the case may be) tax in accordance with "the appropriate code". The appropriate code was to be determined by an inspector who was to have regard, inter alia, to the reliefs from income tax to which the employee was entitled, any other income which was otherwise chargeable under Schedule E, any tax overpaid for any previous year which had not been repaid, any tax remaining unpaid for any previous year which had not otherwise been recovered, and such other adjustments as may be necessary to secure that, so far as possible, the tax in respect of the employee's emoluments for the year to which the code was to have effect was deducted from the emoluments paid during the year: reg 7 ITER. The code could be amended throughout the year to take into account changed circumstances: reg 12 ITER. The employer was required to pay to the Revenue the amount due within 14 days of the end of each income tax month (each income tax month commences on the 6^th day of each calendar month): reg 40 ITER. Nothing in ITER prevented an assessment (including a self assessment) being made in respect of income assessable to income tax for any year: reg 99 ITER. If the tax payable under the assessment was less than the total net tax deducted from the employee's emoluments during the year less any subsequent repayments made, the inspector might repay, and was required to repay if the person assessed so required, the difference to the person assessed instead of taking it into account in determining the appropriate code for the subsequent year: reg 101 ITER.
8. As regards NICs, S.6(1) of the Social Security Contributions and Benefits Act 1992 (" SSCBA") provided that where in any tax week earnings were paid to or for the benefit of 'an earner' in respect of any one employment of his which was 'employed earner's employment' a primary and a secondary Class 1 NIC was payable. The primary Class 1 NIC was the liability of the earner and the secondary Class 1 NIC was the liability of 'the secondary contributor' (commonly referred to as, respectively, 'the employee's NICs' and 'the employer's NICs'). An 'employed earner' meant a person who was gainfully employed in Great Britain either under a contract of service, or in an office with emoluments chargeable to income tax under Schedule E: s2(1)(a) SSCBA. This was in contrast to a 'self-employed earner', who was a person gainfully employed otherwise than in employed earner's employment: s2(1)(b) SSCBA. A 'secondary contributor' in relation to any payment of earnings to or for the benefit of an employed earner was, in the case of an earner employed under a contract of service, his employer: s7(1) SSCBA. Para 3(1) Sch 1, SSCBA provided that where earnings were paid to an employed earner and in respect of that payment liability arose for primary and secondary Class NICs, the secondary contributor was liable in the first instance to pay also the earner's primary contribution, on behalf of and to the exclusion of the earner, and primary Class 1 NICs paid by the secondary contributor on behalf of the earner were to be taken to be contributions paid by the earner. However, para 3(3), Sch 1, SSCBA provided that a secondary contributor was entitled, subject to and in accordance with regulations, to recover from an earner the amount of any primary Class 1 NICs paid or to be paid by him on behalf of any earner, and regulations were to provide for recovery to be made by deduction from the earner's earnings, and for it not to be made in any other way.
9. Para 6(1) Sch 1 SSCBA stated that the Revenue could make regulations for Class 1 NICs to be paid, accounted for and recovered in a similar manner to PAYE income tax. The relevant regulations are to be found in the Social Security (Contributions) Regulations 2001 ("SSCR"). These came into force for the tax year 2001-02. However they were largely consolidating regulations and, for present purposes, there is no need to refer to the predecessor provisions. Reg 67(1) SSCR provided for Class 1 NICs to be paid, accounted for and recovered in like manner as PAYE income tax. Reg 67(2) provided that the provisions in Sch 4 (which contained provisions derived from ICTA and the ITER) shall apply to and for the purposes of earnings-related contributions. Sch 4, para 10 provided that the employer must pay the primary and secondary Class 1 NICs due in respect of each income tax month within 14 days of the end of every income tax month.
10. Reg 52 SSCR provided for the return of contributions paid in error. Reg 52(1) provided that contributions paid in error by a person or a secondary contributor had to be returned by the Revenue to that person or secondary contributor, as the case may be, if application was made to that effect to the Board. Reg 52(5) provided that contributions paid by a secondary contributor on behalf of any person in error and not recovered from that person might be returned to the secondary contributor instead of to that person, but if so recovered might be returned to that person or, with his consent in writing, to the secondary contributor. In other words, where the secondary contributor has 'recovered' the wrongly paid primary Class 1 NICs by deduction from the remuneration of the employee the repayment of the amount paid in error has to be made direct to the employee, unless the employee has consented to the payment to be made to the employer.

The Regimes- self-employed

11. The requirement to deduct sums for PAYE applied where the payee was an employee, (i.e. where there was a contract of service, not where there was a contract for services) or was treated as an employee. The self-employed paid tax under Schedule D Case I on the profits of their trade through the self assessment process.
12. However, pursuant to Part XIII, Chap 4, ICTA, special provisions existed for subcontractors in the construction industry. These applied to a contract relating to constructions operations which was not a contract of employment but one party to the contract was a sub-contractor and another party ("the contractor") was either a sub-contractor under another such contract relating to all or any of the constructions operations or any other person carrying on a business which included construction operation or any other specified body: ss.559, 560 ICTA. On making a payment to which these provisions applied, the contractor was required to deduct from it a sum equal to 'the relevant percentage' of so much of the payment as was not shown to represent the direct cost to any other person of the materials used or to be used in carrying out the construction operations to which the contract related. The payment was required to be paid over to the Revenue and was to be treated for income tax purposes as not diminishing the payment but as being income tax paid in respect of the profits of the trade of the person for whose labour the contractor makes the payment. See s.559(3) ICTA. The 'relevant percentage' as from 6 April 2000 was 18%. Although basic rate tax at this time was 22%, these provisions would not necessarily mean that the amount deducted from a self-employed sub-contractor would be less than the PAYE deducted from sums paid to a person carrying out the same operations in the capacity of employee, because the amount of PAYE to be deducted could take into account the personal and other reliefs available to the employee.
13. No deductions were required to be made if a certificate had been issued by the Board to the payee: s.561 ICTA. For an individual to obtain such a certificate it would be necessary for that individual to show an annual turnover in excess of £30,000. In addition it would be necessary for the individual to show that his business consisted of or included the carrying out of construction operations or the furnishing or the arranging for the furnishing of labour in carrying out construction operations, that his business was to a substantial extent carried on by means of a bank account, that it was being carried on with proper records and that it was carried on from proper premises and with proper equipment, stock and other facilities. See s.562(2) ICTA. As regards NICs, a self-employed person would be required to pay a Class 2 flat-rate weekly contribution, together with a Class 4 contribution payable in respect of the profits from his trade which would be collected through the self assessment tax process: see ss. 11 (Class 2), and 15 and 16 (Class 4) SSCBA.

The Regimes-Agency Workers

14. Where (a) an individual ('the worker') rendered or was under an obligation to render personal services to another person ("the client") and was subject to, or to the right of, supervision, direction or control as to the manner in which he rendered those services and (b) the worker was supplied to the client by or through a third person ("the agency") and rendered or was under an obligation to render those services under the terms of a contract between the worker and the agency ('the relevant contract') and (c) the remuneration receivable under or in consequence of that contract would not, apart from this section, be chargeable to income tax under Schedule E, then, for all the purposes of the Income Tax Acts, the services which the worker rendered or was under an obligation to render to the client under that contract was to be treated as if they were the duties of an office or employment held by the worker, and all remuneration receivable under or in consequence of that contract was to be treated as emoluments of that office or employment and was to be assessable to income tax under Schedule E accordingly: s.134 ICTA. By reason thereof, the agency would be required to operate PAYE in relation to the remuneration paid to the worker.
15. Until 6 April 1999, s.134(5)(c) ICTA provided that sub-contractors providing services to construction operations were excepted from the operation of these provisions. S.134(5)(c) was repealed with effect from 6 April 1999 in relation to any payments made on or after that date, other than any made in respect of services before that date, and any payments made before 6 April 1998 in respect of services to be rendered on or after that date. As regards NICs, s.2(2) SSCBA provided for regulations to be made providing for a person in employment of one prescribed description (ie 'employed earner' or self-employed earner) to be treated for the purposes of the Act as falling within one or other of the categories of earner notwithstanding that he would not fall within that category apart from the regulations.
16. The Social Security (Categorisation of Earners) Regulations 1978 provided (see reg 2, Sch 1 Part 1 Column (A) para 2) that every earner in employment in which the person employed rendered, or was under an obligation to render, personal service and was subject to supervision, direction or control, or to the right of supervision, direction or control, as to the manner of the rendering of such service and where the person employed was supplied by or through some third person and whose earnings for such service were paid by or through, or on the basis of accounts submitted by, that third person or in accordance with arrangements made with that third person, was to be treated as falling within the category of an employed earner.

The Facts

17. There was little if any dispute between the parties about primary facts. I heard evidence from three witnesses for the Claimant, Mr David Jackson, Managing Director, Mr Stanley Dunn, a Tax Manager from Hudson's outside accountants, and Mr Glyn Simpson, Managing Director of a Client, DNC Scaffolding Limited. The Defendant also called three witnesses Mr Andrew Neal, a Status Inspector, Mr Yashpal Anand, his Line Manager, and Mr Robert Fothergill, a special technical advisor. I will mention particular evidence later but emphasise from the outset that each witness seemed to me to be honest, straightforward and helpful in his testimony. Any misunderstandings in evidence seemed to me due to the understandable difficulty in recalling and expressing accurately complex matters, events taking place several years ago and the different legal characterisations which the parties seek to place upon them. Most of the facts were agreed or not greatly in dispute and can be summarised as follows.
18. Hudson began as a partnership in May 1996 becoming a company in April 1997. It provided employment services to contractors working in the construction industry throughout Yorkshire. Hudson served general builders, civil engineers, roofers, scaffolders, plant hirers, house builders and tunnelling and surfacing contractors. Rather than operate as a conventional employment agency Hudson started to provide a service managing the Clients' payroll and regulatory matters relating to their labour-only sub-contractors. Hudson's intention and what Mr Jackson calls its business model was always to provide a service standing as a contractual buffer between its Clients and Workers, taking over the payroll and regulatory burden from the Client. Hudson sought to contract directly with the Workers whom it would then supply to the Client for a fee, initially £10 per week. In the period up until June 2002, with which this action is concerned, Hudson's contract with their Client was generally on standard terms. The "Terms of Business" recorded "Our undertaking":-

"A.	To produce a payroll report on a weekly basis.
B.	To produce payslips on a weekly basis.
C.	To pay wages by cheque/transfer nett of deductions.
D.	To produce SC60 certificates on a bi-monthly basis.
E.	To produce SC11 document on an annual basis.
F.	Or keep P.A.Y.E. records
G.	To send all deductions to the Inland Revenue.
H.	To complete and send all Inland Revenue year end reports."

On the reverse of the form were "Our Conditional Requirements" as follows:-

"A. Clients are deemed to have accepted these terms of business upon commencement of "trading".

B. Hudson Contract Services require a registration form for every individual to be included on the payroll.

C. Clients are required to send our timesheet by fax to reach us not later than 6.00 p.m. Mondays. Amounts and/or rates of pay stated should include our commission of 25p per man per hour or £10 per man per lump sum amount.

D. Hudson Contract Services will not give credit to a client. Gross payments must be made to our bankers prior to the release of payments to the workforce.

E. Changes to the payroll will not be made once the Hudson payroll form has been received. Any errors in stated amounts must be rectified the following week by the client.

F. All workers supplied are under the client control and supervision, and the client is responsible for adequately insuring all workers for public, employers and third party liabilities.

G. The client accepts all responsibilities for provision under the Health and Safety acts and is to ensure that the workers do not contravene any duty or instruction imposed by Law.

H. This company does not warrant the ability of any person on the payroll. This is the clients responsibility.

I. Workers supplied to the client are hired by this company on a short-term contract basis under the employment agencies legislation and acts. Some terms maybe directly employed by the agency and some maybe contracted for the service as self-employed.

J. This company is V.A. T. registered and customs and excise require us to charge V.A. T. on every transaction.

K. This company is a holder of an Inland Revenue 714 tax exemption certificate and will issue 715 vouchers on a bi-monthly basis."

If a client needed additional workers these would be engaged by Hudson. There is a form, not requiring signature from the worker, providing conditions of employment for temporary Workers or/alternatively a short term contract for service by the self-employed. Initially Hudson treated the Workers as self-employed for tax and NIC purposes and therefore did not operate PAYE. However by letter dated 9 February 1988 Mrs Cass, an inspector from the Contributions Agency,( to which the Revenue is the statutory successor), wrote with a "ruling" accepting that there was no direct contract between the Clients and the Workers and that the Workers contracted only with Hudson but concluding that these arrangements fell within the Social Security (Categorisation of Earners) Regulations 1978 and section 134 ICTA. As a result Hudson was required to operate PAYE and pay NICs as if the Workers were employees of Hudson. Hudson was unhappy with this outcome but it complied. The parties disagree about how far this letter was mandatory but I will not rehearse the competing submissions as the legal issue to which it relates has fallen away. To this point therefore it was very clear that Hudson, not the Clients , contracted with the Workers.

19. In 2000 Hudson again contended that its contract with the Workers was not caught by these provisions and, to enable the matter to be determined, the Revenue made a formal decision on 5 December that five particular Workers were, for the period April 1997 to April 2000, to be treated as employed earners and liable to pay primary and secondary Class 1 NICs. Hudson appealed this decision and the matter was heard by the General Commissioners early in 2002. No ruling was made as regards PAYE but it was common ground that this would follow the outcome for the NICs.
20. Hudson argued a case before the General Commissioners that there was no contract at all between it and the Workers and that the only relevant contract was between the workers and the Clients. Hudson's role was as a payroll agent for the Clients. The picture now put forward by Hudson in evidence, in a "Statement of the facts agreed and remaining in dispute" and in Mr Maugham's skeleton argument for that case was consistent with this new and very different approach. Hudson was simply a payroll facility, the Workers would approach the Clients who would inform the Workers that they would be paid through Hudson. Hudson only became involved after the Worker contracted directly with the Client agreeing rates of pay and terms and conditions of engagement, no contract was signed by the Worker with Hudson.
21. This was contrary to what Mr Jackson said was its business model and intention from the outset and also contrary to Hudson's previous representations to the Revenue. This fundamental change of tack did not come out of the blue. As Hudson pointed out in the materials it put to the General Commissioners in an Employment Tribunal in a case between a Mr Brannick and DNC Scaffolding concluded in 2001 "Hudson... do not really come into the picture with regards to whether or not the Applicants are employees or workers. That company is simply a payroll facility for the Respondents".
22. Hudson succeeded with these submissions before the General Commissioners who found:-

"It was agreed between the Appellant and the Respondent that none of the Named Individuals were introduced to the Hirers by the Appellant. The Respondent in paragraph 17 of his Skeleton Argument asserts that the Regulations can only apply if there is no direct contact between the Hirer and the Named Individual. The Appellant in paragraph 11 of their submissions said that there is a Contract between the Hirer and the Named Individual.

We accept that an Oral Contract was formed between the Hirer and each individual worker before any involvement of the Appellant and as a consequence we find that there cannot be said to have been any "supply" within the meaning of the Regulations."

23. The Commissioners concluded that two Workers had in fact been engaged by the Client pursuant to a contract of service and that the Client had been obliged to deduct PAYE and primary Class 1 NICs and to pay secondary Class 1 NICs. The other three workers had been engaged by the Client pursuant to a contract for services and there had been no requirement on the part of the Client to deduct PAYE and primary Class 1 NICs or pay secondary Class 1 NICs, but there was an obligation on the part of the Client to operate the provisions of Part XIII, Chap 4, ICTA. Hudson did not inform its Clients of the position it was adopting before the General Commissioners and had clear commercial reasons for not wanting the Revenue to raise assessments on those Clients once the decision had been published.
24. The parties recognised that as a result of this decision Hudson had not been under any obligation to pay money to the Revenue and that the Client had been under an obligation to deduct and/or pay over PAYE income tax and primary and secondary Class 1 NICs for those Workers who were employees, and to deduct and pay over the sums due pursuant to Chapter IV Part XIII ICTA 1988 for those Workers who were sub-contracted.
25. Shortly after the decision the Revenue met some claims by Workers to recover primary Class 1 NICs and also repay to Hudson £29,228.90 of secondary Class 1 NICs. On 6 June 2002 a meeting took place at the office of Hudson's accountant "to plan out the route to take following the Commissioner's Hearing". The Revenue contend that a contractual agreement was entered into at this meeting. Hudson submit that what was agreed was informal, pragmatic and not a legally binding commitment. The meeting was attended by Mr Jackson and Mr Dunn for Hudson and by Mr Hunt, HM Inspector of Taxes, Scarborough (who has sadly since died), Mr Anand and Mr Neal for the Revenue. Mr Neal prepared a two and a half page note of what was discussed and agreed at the meeting. Although it was the practice of the Revenue to send copies of notes of significant meetings promptly to those present to avoid a future misunderstanding these particular notes did not reach Hudson until late 2004. Mr Neal thought that he must have sent the notes to Hudson (without recollecting that he had) but on the evidence it seems clear that he did not. Mr Dunn, the outside accountant, took a note but this has gone astray.
26. It was understandable that there should be careful cross-examination of witnesses about their recollection of the meeting, but this had taken place more than five years before. Unsurprisingly this exercise generated little material of assistance to my decision. There is however little dispute about what was agreed at the meeting, as opposed to its legal significance, if any. This became clear when both Mr Jackson and Mr Dunn accepted, consistently with their frank approach to giving evidence, that what had been agreed was as set out in paragraph 12 of the Re-re-amended Defence, the relevant part of which provides as follows:-

"(a) In respect of, those Workers who were not employees of the Clients.

(i) the Defendants would repay the primary Class 1 NICs which had been paid in respect of those Workers by making such payments direct to the Workers themselves rather than to the Claimant for onward transmission to the Workers;

(ii) the Defendants would repay direct to the Claimant the secondary Class 1 NICs which had been paid in respect of such Workers (in anticipation of the Claimant repaying such sums to its Clients);

(iii) the Defendants would not repay any PAYE income tax to the Claimant in respect of those Workers who were subcontractors and then collect the amount due from the Clients pursuant to Chap IV, Part XIII, ICTA, but would leave matters as they stood and settle the personal tax affairs of the Workers on the following basis:

(1)------the PAYE income tax payments made in respect of those Workers would be credited to the Workers, whether their income was ultimately assessed to tax under Schedule E or Schedule D;

(2)------the Workers would receive tax refunds or pay tax underpayments as the case may be;

(3) claims would be admitted through the self assessment process from any such Workers for additional self-employed expenses should they have any."

(b) In respect of those Workers who were employees of the Clients there would be no repayments made of any PAYE tax or NICs as those sums had been properly payable by the Clients.

(c) The Claimant would supply a list of those Workers whom it considered not to be employees of the Clients for the Defendants to consider and agree.

27. On 20 June Hudson sent the Revenue a list of 238 Workers which it believed were not employees of the Clients being about 60% of the total. The Revenue agreed with this and the relevant secondary Class 1 NICs were repaid to Hudson with appropriate interest. Hudson forwarded this to their affected Clients. The Revenue set off other obligations against Class 2 NICs and Hudson say that this was contrary to what was agreed at the meeting. On 28 July 2002 after receiving the primary Class 1 contributions Hudson settled various PAYE and NIC deductions retained pending settlement and the Revenue say that from that point they regarded the question of payment as closed, having been resolved, on their case, by the agreement reached on 6 June. The matter resurfaced more than two years later in November 2004 when Hudson wrote a letter before action. That letter was followed by a claim form on 13 December.

The nature of the claim put forward by Hudson.

28. Hudson seeks repayment of:-

(i) the 40% of Employer's Class 1 NICs it paid in respect of those Workers whom the parties have treated as being employees of the Clients;

(ii) the 60% of employees' Class 1 NICs if paid in respect of those Workers whom the parties have treated as being self-employed;

(iii) the 40% of employees' Class 1 NICs if paid in respect of those Workers whom the parties have treated as being employees of the Clients; and

(iv) the 60% of PAYE income tax due in respect of those Workers whom the parties have treated as being self-employed.

29. Hudson brings its claims first under common law under the right established by Woolwich. That is a right to restitution given to a person who pays to the Revenue by error or in protest sums that are not due or which are the result of an unlawful demand. It is common ground that that right is available in principle as regards the PAYE. The claim for the NICs is also brought under Regulation 52 SSCR which gives a statutory right to recovery of contributions paid in circumstances when they were not due. Two unresolved questions of law arose but are not pursued, at least before this court. First Hudson does not resist the Revenue's submission that Regulation 52 is the exclusive remedy for the recovery of NICs paid. Secondly the Revenue no longer submits that the circumstances leading to the original payments fall short of "an unlawful demand" or an obligation or commitment to pay.
30. Although the Re-re-amended Defence raises several issues the essential grounds upon which the Revenue opposes liability are three. First it claims that Hudson had no legal claims against the Revenue because these vested in the Clients for whom Hudson acted as agent. Secondly the Revenue submits that Hudson is estopped from denying that the contractual relationship was that which it represented to the General Commissioners. Thirdly if, which the Revenue denies, Hudson did have a right to claim it was compromised contractually by the agreement or arrangement of 6 June 2002.

Revenue's Claim that Hudson acted as agent for its Clients

31. The Revenue contends that since the General Commissioners found, upon the urging of Hudson, that the Clients engaged the Workers and Hudson operated as a payroll agent the sums paid to the Revenue by Hudson were paid by an agent acting on behalf of its principals. The Revenue accepts that this means that at the meeting of 6 June 2002 its representatives, as well as Mr Jackson and Mr Dunn, were all mistaken about Hudson's legal entitlement.
32. Hudson responds that the decision of the General Commissioners established only the existence of a contract between the Workers and the Clients and said nothing about the nature of the relationship between the Clients and Hudson. Further Hudson paid the money which the Revenue asked for in its own name and on account of what it at the time wrongly believed to be its liabilities, not those of its Clients. Hudson refers, for example, to an internal note of the Revenue recognising that the amounts had been declared by Hudson although "in practice Hudson will be repaying Clients". Further the approach both of the Revenue and of Hudson, until submissions were made to the General Commissioners, was based on the existence of a contract between Hudson and the individual Workers. End of year Summaries are all in Hudson's name and do not mention the Clients. One would expect payroll agents to remit deductions on behalf of their Clients under the references of those Clients. Mr Maugham points to other indications before the case was brought before the Commissioners that Hudson saw itself as the engager of the Workers and liable to account to the Revenue accordingly. He also submits that the Revenue's position on agency is not consistent with what it has done in practice in refunding some of the employer's Class 1 NICs to Hudson.
33. Mr Jones rejects the suggestion that the decision of the Commissioners determined only the contract between the Workers and the Clients because a necessary consequence of that conclusion was that Hudson contracted with the Clients to be no more than payroll agents. What else could they be? Indeed it was to make good the claim that the relevant contract was between the Workers and the Clients that in the course of the proceedings before the General Commissioners Hudson submitted so firmly that its relationship with the Client was no more than a payroll agency contract.
34. I accept that at the time it made the payments Hudson believed that it was making them on its own behalf in discharge of obligations arising from what it assumed to be its contracts with the Workers. The Revenue accepted or shared this belief. But, for whatever reason, there came a time when Hudson changed its perception and asserted that its role was and had been one of payroll agent for contracts between the Clients and the Workers. It then successfully argued that its second thoughts were correct. The issue when one examines the role that Hudson played is not what it, or the Revenue thought it was doing at the time, but what it was ultimately concluded had been going on and what tax regime is appropriate to that. Hudson was acting as a payroll agent, as the Commissioners concluded, and as such would have no role in making the payments to the Revenue except as agent for its Client principals. I therefore conclude that the money was indeed paid by Hudson as agent for its principals. To the extent that the legislation precludes an agent from recovering payments except on behalf of its principal Hudson is therefore unable to succeed in its claim. There are conceptual difficulties in forming a conclusion retrospectively which differs from the assumptions the parties were under at the time but these, it seems to me, all spring from Hudson's extraordinary and unprincipled volte-face before the Commissioners. Quite apart from questions of estoppel it would be artificial to now treat those events as they were seen at the time when Hudson has subsequently persuaded the Commissioners to evaluate them in a different way.
35. Mr Maugham submits that even if the Revenue is correct to that point a conclusion that Hudson carries out only payroll services means it does just that, and that role does not carry with it an obligation or usual duty of paying the Revenue. Furthermore Hudson made payments to the Revenue in its own name and under its own reference number not just annually but by monthly payments. If Hudson made the payments in its own name it did so in breach of the agency relationship. Hudson is not seeking to recover on behalf of its principal because the latter has made no payment. In short if Hudson was indeed a payroll agent it paid sums to the Revenue without the authority of its Clients so can recover them now.
36. Mr Jones replies and protests that this allegation of payment without Clients' authority is not pleaded and as a result the essential material needed for advancing and contesting it are not before the court. He also submits that whatever breaches of duty by Hudson to its Clients may have arisen in the confusion they would not have resulted in payments being made without the authority of the Clients.
37. I would not have allowed this point to be pleaded at such a late stage without giving the Revenue more time to prepare for it. But as there was no application to amend there is no purpose in me dealing with the point. I observe however that there is no material to support Hudson's submission and it is not consistent with the relationship successfully put to the Commissioners. Further if money is paid by an agent in circumstances where this would appear to be on behalf of a principal the fact that the records indicate that the payment was made by the agent on its own behalf will often lead to the conclusion not that there has been a breach of contract but that the documents misrecord the transaction.

Estoppel

38. The Revenue contends that Hudson is estopped from denying that:-

(i) the workers contracted only with the Clients;

(ii) the obligation to deduct and pay PAYE and NICs was that of the Clients and not Hudson;

(iii) Hudson merely operated a payroll facility for and on behalf of the Clients; and

(iv) Hudson made payments to the Revenue as agent for and on behalf of the Clients.

The Revenue relies upon the claims made by Hudson in the Grounds of Appeal to the General Commissioners asserting that it "simply operates a payroll facility for its Clients" and upon all similar material in the Statement of Facts, in Mr Jackson's evidence and in Mr Maugham's skeleton argument in that case. Thus an assertion made by Hudson but not accepted by the Revenue in the Statement of Facts is:-

"4. The Appellant was engaged by its Clients to handle payments by those Clients to Workers. Every week it receives, from each of its Clients, instructions as to how much to pay each of that Client's Workers and, upon receipt of that instruction, the Appellant will make a BACS transfer from that Client's bank account and will then make remittances from the sum received to individual Workers ..."

As the findings of fact and subsequent conclusions of the General Commissioners accepted Hudson's submissions the Revenue argues that Hudson is estopped from denying that. Hudson submits that if a party has advanced a case on a certain basis of fact and/or law and has obtained a judgment against the other party to those proceedings it is unjust that that party should subsequently seek to rely on the "real state" of the facts and/or law as against the other party. He must proceed on the "conventional state of the facts and/or law, established by the representations and the judgment obtained". The Revenue has a fall back argument that Hudson is, at the very least, estopped from contending other than that the Workers' only relevant contract was with the Client and that it did not supply Workers to the Clients.

39. Mr Jones relies upon an estoppel arising, independently of any res judicata, from the conduct of a party during proceedings identified by Viscount Radcliffe in Kok Hoong [1964] AC 993 at 1018:-

"A litigant may ... have acted positively in the face of the court, making an election and procuring from it an order affecting others apart from himself in such circumstances where the court has no option but to hold him to his conduct and refuse to start again on the basis he has abandoned."

Mr Jones cites examples of the application of such an estoppel drawn from Mr Justice Handley's Estoppel by Conduct and Election, 2006 at pages 286 to 8.

40. Mr Maugham submits that the cases cited by the Revenue are authority for a much more limited proposition namely: where X successfully argues for (or voluntarily accepts the benefit of) the ratio decidendi of an earlier decision he cannot, in later proceedings, argue for a different result, an essential element of which result would contradict the earlier ratio. The decision of the General Commissioners was that the Workers had a contract with the Clients, not Hudson. The relationship between Hudson and the Clients formed no part of the ratio and the characterisation of payroll agency was not necessary for the decision. At the time the payments were made the Revenue sought them from Hudson, Hudson believed that it was under an obligation to make them and there was no question of its Clients appointing it as their agent for this purpose.
41. In my judgment the element of estoppel identified by Viscount Radcliffe is, as his words indicate, broader in its ambit than Mr Maugham argues. In this case Hudson has completely disavowed the basis upon which the payments were made, successfully appealed on the basis that the relevant contract was between the Client and the Worker and as part of that contended that its role was limited to payroll agent. It is unrealistic for Hudson to contend that no finding about the relationship between Hudson and the Worker is implicit in the decision. The Commissioners had to form a view about one part of the contractual structure in order to reach a conclusion about the rest of it. In seeking to obtain the fruits of that Decision it would be quite wrong for Hudson to be permitted to recover on some different version of events. lt is important to focus on the fundamentals rather than on the points of detail which each party can identify to support its point of view. Implicit in the findings of the General Commissioners is the conclusion that Hudson's role was that of payroll agent. That is precisely what Hudson argued for. Adopting the words of Lord Radcliffe, Hudson has acted positively in the face of the General Commissioners making an election and procuring from them an order affecting the Revenue in such circumstances that this court has no option but to hold it to its conduct and refuse to let it start again on the basis abandoned (or indeed any other basis).

Agency - effect upon claims and defences

42. As I indicated at the outset Hudson's claims for recovery of the primary NICs, the secondary NICs and income tax in respect, separately of self-employed and employed Workers are brought both under common law and under statute. Mr Maugham prepared a helpful table summarising the approach of Hudson's claim most of which I set out below so that it is clear what categories are sought and on what basis:-

Wrongly paid by Hudson	Self-employed	Employed
Primary NICs	(i) Recovery sought under reg 52 (ii) Not payable in any event (iii) Statutory defence of Class 2 offset in regulation 51	(i) Recovery sought under reg 52 (ii) Assessable on Clients: see regulation 67 and Schedule 4 para 16 of SSSCR 2001/1004 (iii) Statutory defence of regulation 52(10)
Secondary NICs	Already paid to Hudson	(i) Recovery sought under reg 52 (ii) Assessable on Clients: see regulation 67 and Schedule 4 para 16 of SSSCR 2001/04 (iii) No statutory defence
Income Tax	(i) Recovery sought under Woolwich (ii) Assessable on Clients under regulation 14 of IT (SCI)R 1993/743, alternatively, assessable on Workers under section 29 TMA 1970 (iii) No statutory defence	Recovery not sought

The table above sets out, for each category of monies wrongly paid by Hudson,

(i) the basis upon which Hudson seeks recovery of those monies,

(ii) the basis upon which the Revenue could have collected the tax in question (including at the date the Claim was issued), and

(iii) the statutory Defences raised by the Revenue.

43. Primary Class 1 NICs - self-employed Workers. It follows from my conclusion that Hudson is estopped from denying that the payments were made by the Clients (through Hudson as their agent) from deductions made by the Clients (through Hudson as their agent) from the sums payable to the self-employed Workers that any right of recovery is that of the Clients (or the Workers), not Hudson.
44. Hudson has an ingenious claim that it made the deduction of the primary Class 1 NIC from the Worker and purported to pay that sum as a secondary contributor thus entitling it to claim repayment under Regulation 52(10). The answer is it seems to me clear from what the Revenue submit must be a purposive construction of that paragraph. "Contributions paid by a secondary contributor on behalf of any person in error" must include a person who made a payment on behalf of any person mistakenly believing that he was a secondary contributor and was under an obligation to deduct and pay over. As Mr Jones points out the position otherwise would be that the person on whose behalf the payment was made would have no right to recover from the Revenue.
45. PAYE - self-employed Workers. The Revenue accepts that there was no requirement to deduct PAYE from the payments made to the self-employed Workers and pay that over. It follows from my conclusions about agency that it was the Clients who made the payment and although they would have a right of recovery this would take into account what ought to have been paid in any event under the CIS system. If the Clients had brought proceedings the Revenue would have argued that there had been no overpayment because CIS or tax ought to have been deducted and it is likely that, if anything, there had been an underpayment.
46. Primary and secondary Class I NICs. The Revenue contends that as a result of Regulation 52(12) "error" means only one which is made at the time of the payment. There was no error because the earnings were paid by the Clients through their agent Hudson to the Workers. The Workers were liable for the primary Class 1 NICs and the Clients for the secondary Class 1 NICs. Initially the Clients were also liable to pay the Workers' primary Class 1 NICs. The Clients paid the Revenue, through their agent Hudson, both primary and secondary Class 1 NICs and the Clients recovered the primary ones by deduction. Errors in returns to the Revenue which specified Hudson as the Employer rather than the Client were not material nor made at the time of the payment. Further Regulation 52 required the contributions to be returned to the person who made the contributions (subject to irrelevant exceptions). The contributions were paid by the Clients and Hudson is estopped from asserting to the contrary.
47. As the secondary NICs in respect of self-employed Workers have already been paid to Hudson and no recovery is sought for income tax as regards employed Workers there are no further claims beyond those which, as I see it, fail for the reasons I have given.

Alleged agreement

48. If I had found that Hudson had a claim in its own right to recover some or all of its claim (as those attending the meeting on 6 June 2002 believed) the Revenue claims that any such rights were compromised by agreement at that point. As I have pointed out it was not disputed by Hudson's witnesses that the matters set out in paragraph 12(iii) of the Re-re-amended Defence were agreed. The issue was whether that agreement gave rise to a legally binding contractual compromise

Alleged agreement - Revenue submissions

49. Mr Jones points out that the existence or extent of Hudson's authority from Clients at the meeting is irrelevant. The issue is whether Hudson compromised the claims that it had in its own right. On the evidence what was agreed is not in doubt subject to different recollections about the minor question of whether the Revenue would accept the list to be produced by Hudson as accurate without random independent checks. The Revenue did accept the list but on balance it seems to me more likely than not that they would have reserved the right to conduct checks. It seems to me improbable that the Revenue would commit itself to accept regardless whatever list Hudson produced.
50. Mr Jones points out that the agreement was very much in the interests of Hudson as it was anxious that the Revenue should not be in touch with the Clients direct, let alone raise assessments against them. It made sense both for the Revenue and for Hudson that the PAYE/NICs for employed Workers should be left as they were rather than the Revenue repaying Hudson but then collecting back from the Clients. With the self-employed Workers it made sense for the secondary Class 1 NICs to be paid to Hudson (who would then pass these on to the Clients) and for the primary Class 1 NICs to be repaid to the Workers. As regards PAYE nothing would be done as it was likely that less cash had been paid than ought to have been paid through CIS.
51. The Revenue submits that an agreement may be legally binding even though it is conditional upon, for example, Hudson producing a satisfactory list. The nature of the obligation entered into involves an objective assessment from all the relevant evidence and not an evaluation of the subjective intention of the participants. In practice Hudson gave effect to the agreement by producing the list and subsequently writing in terms consistent with the proposed agreement. The Revenue relies on a letter written by Hudson on 4 July 2002 appearing to recognise an agreement. The Revenue also relies on a letter from Mr Dunn, not sent because it was overtaken by events, consistent with an agreement having been reached, which permitted Mr Jackson to "settle all outstanding matters without any undue further delay and get on with his life". On 16 July Mr Jackson claimed the remaining secondary Class 1 NICs, consistently with the alleged agreement and did so without qualification. On 29 July Hudson acknowledged that receipt of these NICs was part of "the refund due" and from the end of the summer until more than two years later on 23 November 2004 there was no suggestion that Hudson regarded this dispute as anything other than settled. Moreover Mr Jackson himself later wrote in terms indicating that he considered that a deal had been done. Thus on 9 August 2002 he wrote to the Revenue stating:-

"... the practical application of the Tax Commissioners ruling was resolved at a meeting between ourselves, Mr Hunt & Mr Neil at the offices of our accountants Lloyd Dowson on 06/06/02. Final application of our agreed settlement was made by paying our "suspended" PAYE deductions on receipt of our quantified over-payment for 1998-2000."

Mr Jackson also wrote on 8 October 2002, to the Workers claiming repayment, in terms which included

"the Revenue asked us if we would make an ex-gratia payment to you as part of the overall basis of settlement covering some 412 operatives".

Alleged agreement - submissions of Hudson

52. Mr Maugham points out that the Revenue commonly enters into written compromise agreements with taxpayers but that there was none in this case. The Revenue commonly provides notes of significant meetings to the taxpayer but failed to do so in this case. These he submits are good indications that there was no intention to enter into a legally enforceable commitment at the meeting on 6 June 2002. Hudson submits that the notes, once they were produced, indicate a conversation expressed in terms falling short of the precision to be expected from an enforceable compromise, requiring the Revenue to do nothing more than it had already started to implement. Mr Neal accepted this latter point in cross-examination until other aspects of the agreement had been drawn to his attention in re-examination.
53. Hudson suggests that it is not consistent with an agreement that the Revenue had already started what it is said to have promised to do before the meeting took place. Some of the subsequent Revenue documents are not consistent with a compromise. The note of a conversation between Mr Jackson and Mr Neal on 3 July is one example as there are references to "potential" repayments of NICs. What began as a suggestion in Hudson's skeleton argument that those present at the meeting might not have authority to contract on the Revenue's behalf became, by the end of the trial, an assertion to that effect. Hudson complains about the absence of evidence from the Revenue of the authority of the late Mr Hunt and points to the fact that Mr Neal needed approval before taking things forward.
54. Hudson also points out that when its further claims for repayment of secondary Class 1 NICs were processed and authorised, papers to give effect to that were sent to Hudson. A point came when the Revenue sought to enforce a claim against Hudson's assets for unpaid money, a move inconsistent with the so called agreement recorded in the notes. The Revenue set off Class 2 NICs against payments of Class 1 NICs made to Workers not consistently with the alleged agreement. There is a general absence of characterisation by the Revenue of what was resolved at the meeting as being a compromise agreement. Finally Hudson points to the oral evidence of both Mr Jackson and Mr Dunn to the effect that they would not have entered into a binding agreement to resolve Hudson's claims for PAYE and NICs without simultaneously agreeing the way forward as regards future claims and also the company's claim for compensation against the Revenue.

Alleged agreement - Conclusion

55. There is cogency in Hudson's submission that one might expect the Revenue, if intending to enter into an agreement with a tax payer, to record this in writing or at least provide notes of the meeting at which the contract is said to have taken effect. It also seems to have been a long time before the Revenue characterised what has happened in terms of a legally binding contract. There are other minor matters pointing towards both sides of this argument. But when one looks at the major matters the evidence points very clearly to the existence of a binding agreement between the parties to resolve issues outstanding from the Commissioners' decision. There is no dispute at all between the parties about what was actually agreed, the debate is about its legal status. In the ordinary way the Revenue could have contacted and raised assessments against the Clients and indeed at the start of this action were still legally able to do so. This would not however have served the interests of Hudson who had every interest in securing the outcome reached on 6 June. The outcome also suited the Revenue and simplified its task as Mr Jones explains in paragraphs 52 to 55 of his closing written submissions. The straightforward and mutually advantageous outcome may be a reason why it was not more closely documented. There is nothing in the claim that what happened following that meeting was precisely what would have occurred in any event and therefore can be of no binding effect. In practical terms the parties gave effect to what was agreed at the meeting albeit with the minor variation which Hudson has identified. By the end of the summer of 2002 it seemed clear that the issues arising from the General Commissioners' decision had been not only agreed but resolved. The fact that Hudson did not bring a claim for more than two years is not of itself of any legal significance but it does indicate that it was apparently content with the outcome. Mr Jackson and Mr Dunn may have hoped to bring other issues into a wider deal but it seems to me clear that the issue of the consequences of the Commissioners' decision was agreed separately on 6^th June. By August 2002 Mr Jackson had, as I point out above, written to the Revenue stating that the practical application of the General Commissioners' decision had been resolved at the meeting on 6 June and a final application of the agreed settlement made by Hudson paying the PAYE deductions to which he refers. That is what the Revenue claims and it is what Mr Jackson accepted. It is therefore very clear that the parties' agreement on 6 June 2002 compromised the issues arising from the General Commissioners' decision including the claims for payment put forward in this action.

Conclusion and other matters

56. Hudson's claims therefore fail. I have dealt above with the main issues in this case including one, the question of the 6 June agreement, which does not arise given my earlier conclusions. I have also referred to some issues raised on the pleadings but not pursued. I am conscious that the complexity of the tax issues may be such that further questions arise now that I have decided the main points. If that is the case I shall be grateful if Counsel will let me have a note of what these are so that I can deal with them when handing down this judgment. Will Counsel please also submit a note of agreed corrections of the usual kind and of any matters which they wish to raise at the handing down of the Judgment, together with a draft order? I am very grateful to both Counsel for their assistance and patience when explaining detailed questions of tax law.