United Kingdom Special Commissioners of Income Tax Decisions

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Cite as: [2004] UKSC SPC404, [2004] UKSC SPC00404

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Usetech Ltd v HM Inspector of Taxes [2004] UKSC SPC00404 (12 March 2004)

NATIONAL INSURANCE CONTRIBUTIONS — intermediary rules ("IR35") — whether worker to be regarded as in "employed earner's employment by the client" — Social Security Contributions (Intermediaries) Regs 2000, reg 6 — yes — appeal dismissed

INCOME TAX — FA 2000, Sch 12 para 1 — whether worker to be regarded as an employee of the client — yes — appeal dismissed

THE SPECIAL COMMISSIONERS

USETECH LIMITED Appellant

- and -

GRAEME W YOUNG (HM Inspector of Taxes) Respondent

Special Commissioner: Colin Bishopp

Sitting in public on 22 January 2004

David Smith of Accountax for the taxpayer

The inspector in person

DECISION

The taxpayer company, Usetech Limited, traded from 1996 to 2003. Its shareholders and officers were William Hood and his wife, but only Mr Hood was actively engaged upon the company's business, and there were at no time any other employees. The company ceased to trade when Mr Hood became seriously ill, and incapable of working. His skills lay in the production of design drawings of oil wells, rigs and similar equipment. In particular, he is, or was, a specialist in the use of a software product known as Pro-Engineer, which produces 3-D models of such equipment. The company's business was, in effect, the hiring out of Mr Hood to various companies engaged in the oil industry.

Between 1996 and 2000 Mr Hood undertook work for various companies; in his evidence he identified four engagements. The first was with ABB Vetco Gray ("ABB"). The taxpayer's contract with ABB was effected through the medium of an agency, NES International Limited ("NES"). Mr Hood was interviewed by ABB before it agreed to engage him, although there was at no time any contract between ABB and Mr Hood, nor between ABB and the taxpayer. ABB contracted with NES which in turn contracted with the taxpayer for the provision of Mr Hood's services. The engagement lasted for about 8 months, from June 1996 to February 1997. From then until June 2000 Mr Hood undertook work for companies other than ABB, save for a period of about three months during which the taxpayer was unable to secure any work for him.

In May 2000 the taxpayer entered into a further contract with NES for the provision of Mr Hood's services to ABB. The contract was initially expected to be of quite short duration – a matter of weeks – but in fact Mr Hood remained for some 17 months. The taxpayer then secured a further short-term contract with another company before again agreeing with NES to supply Mr Hood's services to ABB; it did so from February 2002 until Mr Hood ceased work in May 2003.

I am concerned in this appeal only with the period from 1 June 2000 to 30 March 2001 inclusive, during the whole of which Mr Hood's services were supplied to ABB. The Revenue contends that the supply comes within what are colloquially referred to as the "IR35" rules, and are identified more specifically as regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000/727) which deals with national insurance contributions, and Schedule 12 to the Finance Act 2000 which deals with income tax. Regulation 6 of the 2000 Regulations is in these terms:

"6(1) These Regulations apply where —

(a) an individual ('the worker') personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ('the client'),

(b) the performance of those services by the worker is carried out, not under a contract directly between the client and the worker, but under arrangements involving an intermediary, and

(c) the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would be regarded for the purposes of Parts I to V of the [Social Security] Contributions and Benefits Act [1992] as employed in employed earner's employment by the client.

Paragraph (1)(b) has effect irrespective of whether or not –

(a) there exists a contract between the client and the worker, or

(b) the worker is the holder of an office with the client.

(2) Where these Regulations apply –

(a) the worker is treated, for the purposes of Parts I to V of the Contributions and Benefits Act, and in relation to the amount deriving from relevant payments and relevant benefits that is calculated in accordance with regulation 7 ('the worker's attributable earnings'), as employed in employed earner's employment by the intermediary, and

(b) the intermediary, whether or not he fulfils the conditions prescribed under section 1(6)(a) of the Contributions and Benefits Act for secondary contributors, is treated for those purposes as the secondary contributor in respect of the worker's attributable earnings

and Parts I to V of that Act have effect accordingly.

(4) Any issue whether the circumstances are such as are mentioned in paragraph (1)(c) is an issue relating to contributions that is prescribed for the purposes of section 8(1)(a) of the Social Security (Transfer of Functions etc) Act 1999 (decision by officer of the Board)."

The corresponding provisions of Schedule 12 to the 2000 Act, so far as they are material, read:

"(1) This Schedule applies where –

(a) an individual ('the worker') personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ('the client'),

(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ('the intermediary'), and

(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client …

(4) The circumstances referred to in sub-paragraph (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided …"

I omit the remaining provisions of Schedule 1. Although they are relevant to the taxpayer's liability, it was agreed by the parties that I need not concern myself with them since the appeal is to be resolved on narrower grounds.

Formally, this is an appeal against a decision made on 18 January 2002 under section 8 of the Social Security (Transfer of Functions Act) Act 1999 in respect of regulation 6, and a further decision of the same date made under regulation 49 of the Income Tax (Employments) Regulations 1993 (SI 1993/744) in respect of Schedule 12, the combined effect of which, if they are correct, is that Mr Hood is to be treated for national insurance and income tax purposes as if he were an "employed earner" of the taxpayer; the consequence will be that the taxpayer is required to account for national insurance contributions and income tax accordingly: see regulation 2(1) and Schedule 12 paragraph 2(1) respectively. I am not asked to consider the amounts of national insurance contributions and tax due, but merely the correctness of the decisions. Although, as the extracts I have set out show, the legislative provisions for national insurance and income tax differ slightly, the test and the relevant considerations to be adopted in applying it are essentially the same in each case.

It was accepted by David Smith, representing the taxpayer, that paragraphs (1)(a) and (1)(b) of each set of provisions were satisfied, that Mr Hood was "the worker" and that ABB was "the client", although it should be pointed out that he accepted, in relation to paragraph 1(a) of each set of provisions, only that Mr Hood in fact personally performed the work, and not that he was under an obligation to do so. He accepted too that if these provisions apply, the taxpayer is the "intermediary". The dispute between the parties was, in essence, whether the slightly different tests prescribed by paragraph (1)(c) of each set of provisions were satisfied. The wording of the provisions, requiring an examination of "the circumstances", indicates that the test is primarily factual, although the authorities show that there are also issues of law, and guidelines to be followed in evaluating the facts; in other words, I must examine the facts in the light of the existing case-law. I agree with the view expressed in Lime-IT v Justin [2003] STC (SCD) 15 that, while the "contract" between the client and the worker may be hypothetical, it is necessary to consider the actual, rather than any hypothetical, facts of the case. I turn, therefore, first to consider the evidence. I heard from Mr Hood, from Gerald Parker, a Revenue officer who made enquiries into the circumstances of Mr Hood's engagement, from Alexander Hunter, ABB's human resources manager and from Paul White, ABB's engineering manager. I find the following facts.

ABB is in the business of providing equipment for the oil and gas industry. It has a core staff of 750 to 850 permanent employees, but supplements that staff, when demand requires, by taking on what Mr Hunter described as "sub-contract employees". The company's needs were identified by those (such as Mr White) in charge of its various activities and were notified to Mr Hunter and his team, who satisfied the need by taking on temporary staff. They did so, in every case, by means of specialist agencies of which NES was one. ABB would in no circumstances enter into a direct contractual relationship with a temporary staff member. As it happens, an offer of permanent employment (which would have been by way of direct contract between ABB and him) had been made to Mr Hood, but he declined it for family reasons. The fact that ABB had sufficient confidence in him to offer permanent employment did not alter the manner in which they were willing to engage him temporarily – he had to come through an agency. However, although temporary workers were always engaged through agencies, it was ABB's practice to interview them individually before they were accepted; Mr Hunter had himself interviewed Mr Hood before he was first taken on by ABB in 1996. A temporary worker did not need to be interviewed again before each engagement and Mr Hood had, therefore, undergone only one interview. The purpose of the interview is primarily to verify that the proposed temporary member of staff has the requisite skills for the work required of him; thus ABB relied on its own judgment and did not accept such temporary staff as the agencies offered.

The taxpayer's contract with NES was in a standard form prescribed by NES. Three versions of NES' terms and conditions, whose differences had been identified and analysed by the Revenue, were among the documents produced at the hearing. Although there are indeed differences, I do not find them of great significance for the purposes of this decision. Moreover, the evidence did not make it entirely clear which version governed the relationship between NES and the taxpayer, nor whether the terms as originally agreed had been varied during the course of his engagement. I was provided too with a copy of the contract between ABB and NES; it is not relevant for present purposes, save for one point to which I shall return. The contract between NES and the taxpayer, so far as relevant to this appeal, was set out in a letter of 22 May 2000, sent by NES to the taxpayer; the letter stated that it incorporated NES' terms and conditions. It began with these words:

"We are pleased to offer you a contract to supply contract staff in a position as Pro-Engineer Designer in accordance with the following:

NAME OF CONTRACT STAFF: WILLIAM HOOD

CLIENT: ABB VECTO GRAY REPORT TO: Mr Sandy Hunter

RATE: £30.00 Per Hour TIME: N/A

COMMENCEMENT DATE: 30^TH May 2000 NOTICE PERIOD: 7 Days"

As ABB's needs continued, the contract between NES and the taxpayer was renewed by letters in an similar form, save that Mr Hood's name did not appear in the letter in order to identify the contract staff to be supplied.

Neither the letters nor NES' terms and conditions specified the hours of work – that is, the starting and finishing times, or the number of hours of work required each day, week or month. By contrast, ABB's agreement with NES stipulated that ABB would provide not less than 37.5 hours of work per week. I recognise the force of Mr Smith's argument that neither Mr Hood nor the taxpayer was a party to that agreement, and would not be bound by it – indeed they may have been quite unaware of its terms – and I recognise that the stipulation about hours of work was not repeated in NES' contract with the taxpayer. Mr Hood's evidence was that he determined himself the hours he would work, starting and finishing at times to suit himself and taking holidays when he wished, although as a matter of courtesy he told ABB in advance of his intentions. Flexibility was of some importance to him since he lives in Newcastle but was working at ABB's offices in Aberdeen, staying in lodgings. He stayed in Aberdeen for some weekends, working at ABB's offices, but would otherwise travel home. On some occasions he was asked to work at the weekend, but declined as he had planned to travel home. Conversely, he had no guarantee of work; if, unexpectedly, work he had intended to perform at a weekend was cancelled, or for some other reason there was no work for him to do (he gave the example of ABB's computers crashing), he was sent home or to his lodgings and, unlike permanent, employed staff, he was not paid in those circumstances: he was paid only for the hours he actually worked. Similarly, he did not receive sick pay, or holiday pay.

In substance, that evidence coincided with what I was told by Mr Hunter and Mr White, though each said that, while Mr Hood had some flexibility about the hours he decided to work, he was expected to agree those hours with Mr White or the technical manager to whom he reported and, within reason, to keep to those hours. Mr White's evidence went rather further: he said that staff, both permanent and temporary, were normally expected to begin work at 8am and finish at 5pm, but those hours could be extended and Mr Hood had, in fact, worked longer hours on occasion. As a general rule, temporary staff were expected to work 50 hours a week, and Mr Hood did so. If he wanted time off, or to take a holiday, he was expected to seek agreement in advance to his doing so in the same way as would be required of an employee. If the workload were heavy, Mr White said, he might refuse permission but he accepted that if Mr Hood insisted on taking a holiday he could not, in practice, prevent him from doing so, although the situation had never arisen. Both Mr Hunter and Mr White accepted that Mr Hood could be sent home without pay though, without ruling the possibility out, neither recalled an occasion on which it had happened. He would certainly be laid off, with minimum notice, if the project on which he was working came to an end and no other work was available; as Mr Hunter explained, it was ABB's ability to adopt that course which had led it to engage temporary staff through agencies.

Some comment was made at the hearing about the fact that Mr Hood was required to complete time sheets, recording the hours he worked, and to have them signed by a suitable member of ABB's permanent staff. I regard that as a matter of no real significance. It seemed to me to be no more than the means by which both he and ABB could record the hours for which he was to be paid, and by which NES could be notified of the hours for which payment was due, since it was through NES that the taxpayer was remunerated.

It seemed to me from the evidence that, apart from his not being an employee of ABB, any temporary member of staff was treated, on a day-to-day basis, in a manner barely distinguishable from an employee. He was required to carry a security pass (albeit one identifying him as a temporary, rather than permanent, member of staff) and to attend safety briefings, though these two requirements are not, in my view, of any significance; they seem to be no more than common sense demands. Likewise I find it of little significance that (even if after some time had passed by) Mr Hood became a user of ABB's email system. The fact that he was engaged only temporarily did not diminish the need for communication with him. I also read no significance into the fact that the intellectual property rights in the designs produced by Mr Hood were retained by ABB. Whatever his status, it would in my view be quite remarkable if ABB, having paid Mr Hood (if only indirectly) to produce such designs, had then left him at liberty to sell them to its competitors.

More important, to my mind, were the manner in which work was allocated, performed and checked, and the working hours expected of Mr Hood. The evidence showed that work was allocated to the total complement of about 60 engineers and designers available to Mr White at weekly meetings, at which the staff were assigned to project teams. Those teams were led by technical managers, who reported to Mr White. Mr Hood reported to the technical manager to whose project team he was assigned at any given time. Mr Hood was thus expected to, and did, accept those tasks allocated to him at weekly meetings. ABB provided all the necessary equipment including particularly working space at its own premises (where Mr Hood was required to undertake the work) and the computer and software necessary for its performance. Although nominally Mr Hood was engaged on a project-by-project basis, it was apparent from the evidence that he did whatever was required of him, within his skills, as the demands of ABB's business dictated. His work was checked in the same way as that of ABB's own employees, but I do not regard that as a significant factor since the stringent safety requirements ABB and its own customers imposed rendered careful checking inevitable. Mr Hood was at pains to point out that, although he was told what he was required to produce, he was not told by ABB how he should go about doing so. He described his own skills as unique, a view which Mr White did not share although he did accept that Mr Hood needed no instruction and was a highly competent user of Pro-Engineer. I accept that Mr Hood, once allocated a task, was able to accomplish it without guidance or instruction and that none was given or offered by ABB. The point was made that Mr Hood had little or no contact with ABB's customers but since it was not explained whether ABB's employees doing similar work might have had such contact I leave this factor out of account.

Mr Smith drew my attention to the requirement in NES' terms and conditions that the taxpayer should take out employers' liability, public liability and professional indemnity insurance, a course which Mr Hood told me he had adopted. Mr Hunter's evidence was that ABB obtained its own insurance, and did not expect temporary staff to provide their own. There was some suggestion, to put it no higher, that NES' conditions were drafted, and adapted as time went by, in order to counter possible arguments by the Revenue that those subject to them came within the IR35 rules, and that the insurance requirement was included as part of that strategy. Even if that is correct, it is in my view unsurprising that NES required a sub-contractor (as it was described) such as the taxpayer to obtain such insurance, for its rather than ABB's protection. I accept it as a factor which points to the conclusion that the taxpayer had some obligations beyond the mere supply of Mr Hood's services, but I do not regard it as a matter of great importance in itself.

Of greater potential significance, I think, is the provision in the taxpayer's contract with NES which allowed for the substitution, by the taxpayer, of an alternative worker. The three versions differ slightly in their wording, though in substance all three seem to me to be identical. One version reads as follows:-

"14.4 The Sub-Contractor shall be entitled to substitute alternatives for the Personnel, with the prior written consent of the Company – such consent not to be withheld if the proposed replacement has the appropriate skills, qualifications and abilities in the reasonable opinion of the Client."

The "Company" is NES. The "Personnel", as I have indicated, was identified in the first of NES' letters as Mr Hood, but was not identified in the later letters. Mr Hunter's evidence was that ABB's intention was to secure Mr Hood's services. If he had become unavailable, for example because of prolonged illness, ABB would have heeded his recommendation of a replacement, but the replacement would have been interviewed, as Mr Hood himself and all other temporary staff had been, and taken on by ABB only if he was considered suitable. ABB would have regarded his being taken on not as a mere variation, still less a continuation, of the arrangements by which Mr Hood had been engaged, but as a new contract which, in common with all other engagements of temporary staff, would have been effected by means of an agency. I will return later to the significance of this point, as I perceive it.

Mr Hood told me that while he was engaged by ABB he had also undertaken work for two other companies. He had a computer with a copy of Pro-Engineer installed on it (which the taxpayer kept up to date at considerable expense) at his home and he was able to use the computer and the software both in order to undertake work for other clients of the taxpayer, and also to maintain his own skills. He had undertaken the work required by the other companies in the evenings and at weekends. It was apparent that the value of these contracts (in each case, as I accept, entered into by the taxpayer, rather than by Mr Hood personally) was fairly modest – the fee had been about £800 in each case. Mr Hunter told me that he would not have approved of Mr Hood's doing significant amounts of work for other companies while he was engaged by ABB, which wanted his services full-time, but he would not disapprove of his undertaking small contracts, such as these, in his spare time.

Mr Parker's role had been to investigate Mr Hood's and the taxpayer's contractual relationships with NES and ABB. He identified many of the matters with which I have already dealt in this decision but since I am required to make my own findings of fact, and am in no way restricted by Mr Parker's conclusions I do not think there is anything to be gained by reciting the detail of his evidence.

The legislative provisions which I have set out require me to consider a fiction, that is a notional contract between ABB and Mr Hood from which the taxpayer is absent: see also R (Professional Contractors' Group Ltd and others) v Inland Revenue [2001] STC 629. It was agreed that the use of a third party agency, NES in this case, must be left out of account; see also F S Consulting Ltd v McCaul (Inspector of Taxes) [2002] STC (SCD) 138 at 146. The test is, therefore, had there been a direct relationship between ABB and Mr Hood, would it have been a contract for services, or a contract of service? If the former, there can be no question of employment and the appeal must be allowed; if the latter the inevitable consequence is that the third condition in each of the statutory provisions is satisfied and the appeal must fail.

The distinction between a contract for services and a contract of service has been the subject of many decisions of the courts and the Special Commissioners over the years, and I was referred by the parties to several such cases, and provided with copies of a great many more some of whose relevance seemed tenuous at best. The cases show that it is, essentially, a question of fact and, to some extent, of impression. The essential criteria were most clearly identified by McKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 at 515 when he said:

"A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service".