United Kingdom Special Commissioners of Income Tax Decisions

SPC00457

NATIONAL INSURANCE CONTRIBUTIONS – IR35 – computer services heading a team supporting and maintaining a computer system under a series of six monthly contracts – whether hypothetical contract would be an employment contract – yes – appeal dismissed

THE SPECIAL COMMISSIONERS

NETHERLANE LIMITED Appellant

- and -

SIMON YORK Respondent

Special Commissioner: DR JOHN F. AVERY JONES CBE

Sitting in public in London on 15 and 16 December 2004

A D Robertson FCA CTA for the Appellant

Mike Faulkner, HM Inspector of Taxes, Inland Revenue Southern England Regional Appeals Unit, for the Respondent

© CROWN COPYRIGHT 2005


 


DECISION

1. This is an appeal by Netherlane Limited against a decision letter dated 9 September 2003 that the circumstances of the arrangements between Mr M J Renshaw and AMP UK (formerly NPI) for the performance of services from 6 April 2000 to 23 February 2001 were such that the "IR35" legislation applied to National Insurance contributions. The parties have agreed that the decision will be applied to the period to 28 September 2001. The Appellant was represented by Mr A D Robertson FCA ATII; and the officer by Mr Mike Faulkner.

2. Both Mr Robertson and Mr Faulkner had put in a tremendous amount of work in preparing the case for which I am grateful. Mr Robertson's written case ran to 74 pages; and Mr Faulkner's skeleton to 25 pages very helpfully cross-referenced to the documents. The bundle of documents ran to 364 pages and the witness statements to 32 pages. In spite of all this I regret to say that I thought that much of the efforts on the Appellant's side were misdirected and at the end of this decision I shall make some observations which I hope will be of assistance to others in the preparation of IR35 cases.

   Findings of fact

3. There was the following statement of facts not in dispute

   (1) Mr Martin J Renshaw left University in 1979 and became employed by Hambro Life (which later became Allied Dunbar) as a trainee computer programmer. He remained employed by Allied Dunbar until 1997 at which time he had attained the status of IT Project Manager.

   (2) The Appellant company was incorporated on 10 June 1997. Throughout its existence Mr Renshaw has been the sole director and has held 60% of the shares. Mr Renshaw's wife holds the remaining 40% of the shares.

   (3) For the purposes of this appeal, and subject to any amendment to returns necessitated by the Commissioner's decision, it is agreed that, with the assistance of a chartered accountant, the Appellant has complied with its obligations under company, business and taxation law. In particular it has done the following:

   (a) Prepared annual accounts in compliance with company law and accounting standards;

   (b) Submitted its accounts to Companies House and to the Inland Revenue;

   (c) Prepared and submitted corporation tax returns each year;

   (d) Written up payroll records, prepared payslips and submitted PAYE/NI returns to the Inland Revenue;

   (e) Maintained a register of its fixed assets;

   (f) Registered for VAT and submitted VAT returns;

   (g) Required MJR to submit formal expense claims in respect of company business expenses incurred by him on NL's behalf;

   (h) Prepared and submitted to the Revenue forms P11D and P11D(b);

   (i) Invoiced its services to clients such as RML on credit terms using formal VAT invoices;

   (j) Maintained a sales ledger to control the collection of customer debts;

   (k) Maintained insurance cover for employer's liability, public liability, products liability and professional indemnity risks.

   (4) The Appellant was offered a contract by a company called Resource Matters Ltd (RML) which required NL to provide IT services at the Cardiff premises of their client NPI Limited (NPI) (which later became AMP).

   (a) The first contract commenced around 1 September 1997 and was for a period of 26 weeks.

   (b) Shortly before the end of this term, a fresh 26 week contract was agreed and this pattern continued until June 2001.

   (c) AMP notified Mr Renshaw in June 2001 that they would not have any further use for his services after 28 September 2001 and would not be prepared to offer a further 26 week contract as in the past but offered a 4 week contract instead. The reason given was that it was the policy of AMP (having taken over NPI) to use company employees to perform these services.

   (5) AMP worldwide restructured in 2003. The UK operations are now part of HHG plc.

   (6) The contract between Mr Renshaw and the Appellant for the 26 week period to 25 August 2000 and signed by Mr Renshaw on 9 February 2000 consisted of a double sided sheet of A4 paper. One side is headed "Resource Matters Ltd Contract for Services by I.T. Consultant". The other side is headed "Contract Assignment Schedule" and contained details of the actual assignment.

   (7) Subsequent contracts consisted of a seven page "Contract Supply Agreement" that, other than the date and signatories, did not change from contract to contract plus a single page "Assignment Schedule" similar, but not identical, to the "Contract Assignment Schedule" of the old contract. The first new contract between Mr Renshaw and the Appellant also covers the 26 week period to 25 August 2000. It is dated 3 April 2000 but signed by the Appellant on 3 May 2000 and by RML on 8 May 2000.

   (8) RML made a corresponding series of 26 week contracts with NPI to supply Mr Renshaw's services to NPI. Each contract consisted of 2 pages that, other than the date, did not change from contract to contract together with a single page schedule that contained the details of the assignment.

   (9) Summaries of the information on the Mr Renshaw/the Appellant and NPI/RML schedules for the relevant period are attached [not included as these are summarised below].

   (a) Although the schedule to the 20 July 2000 NPI/RML agreement shows the rate per working day inclusive of VAT paid RML to be £664.53, the rate actually paid was £650.95.

   (10) A decision under S8 of the Social Security Contributions (Transfer of Functions, etc) Act 1999 for the period 6 April 2000 to 23 February 2001 was made on 9 September 2003 and appealed, with an election for the appeal to be heard by the Special Commissioners, on 25 September 2003.

4. I heard oral evidence from Mr Renshaw, Mr Jonathan Summers (RML), Mrs Quinn (RML) by telephone conference call arranged on the second day's hearing, and from the officer who made the decision, Mrs Sue Gibb. I also had a witness statement from Mr Michael Clark (formerly of NPI) and I have read some correspondence with HHG plc, and Mr J W Turner formerly of NPI. I find the following facts:

   (1) In 1997 Mr Renshaw decided to seek higher potential rewards by setting up as a freelance IT consultant finding work through recruitment agencies who expected him to operate through a company. He formed the Appellant of which he is the sole director and owner of 60 % of the shares, the other 40% being owned by his wife. At its peak he would earn two or three times what he would earn as an employee (although I imagine that this figure did not take fringe benefits into account).

   (2) The recruitment agency the Appellant used in the relevant period was RML who from the beginning in 1997 found work with NPI. During the period in question the Appellant entered into the following contracts with RML (the lower level contracts): (a) 26 February 2000 to 25 August 2000, (b) from 26 August to 23 February 2001, (c) 24 February 2001 to 24 August 2001, and (d) a final one month contract 27 August 2001 to 28 September 2001. Strictly, only contracts (a) and (b) are in issue but as the parties have agreed that the decision will apply up to 28 September 2001 I have included information about the whole of the period.

   (3) As stated above, there are two versions of contract (a) covering the identical period, one signed on 9 and 17 February 2000 but undated at the start, and the other signed on 3 and 8 May 2000, and dated 3 April 2000 at the start. The second version seems to have arisen from changes, which are set out in a letter to Mr Renshaw, made to the standard form on account of the IR35 legislation. The changes include that the Appellant will not engage in any conduct detrimental to the RML or the client, instead of that it will give priority to the Services over all other business activities; that the Appellant may (rather than shall) provide services at the location of the client; changing references to time sheets to work sheets; deletion of a clause requiring the Appellant to obey all lawful and reasonable directions of RML or the client; addition of a new provision that the Appellant will provide at its own expense any training that Mr Renshaw may require in order to perform the consultancy, that that it will provide all necessary equipment as is reasonable for the adequate performance by Mr Renshaw (subject to any agreement to the contrary specified in the Assignment Schedule) [which there is not]; the restriction of the Appellant's limitation of liability to £1m rather than its being unlimited; the addition of the type of insurance cover required; addition of a disclaimer that RML makes no representation and takes no responsibility for ensuring that the terms of the contract are an accurate reflection of the relationship between the client and the Appellant, and also that RML accepts no liability for any liabilities "whether by reason of tax or other statutory or contractual liability to any third party arising from the Assignment." In the Assignment Schedule, 35 hours per week is replaced by 5 professional working days; under payment terms on invoice is changed to 7 days/weekly; references to a notice period of 4 weeks (which does seem to relate to anything in the contract) and to overtime are deleted. No changes were made to the upper level contract (see paragraph 4(5)) at the same time. In what follows, references to contract (a) are to the later version, although the earlier version was in force until the amendment. Mr Summers said (and I accept) the amendment was agreed in principle in March 2000 but he did not say that it was agreed by the Appellant, and Mr Renshaw merely said that that it was varied with effect from 3 April 2000 although signed later. Since the amended version was sent to him with a covering letter of 17 April 2000 explaining the changes I find that the amendment was made at the date of signature on 3 and 8 May 2000.

   (4) The lower level contracts were in standard form with an "Assignment Schedule" specific to the particular work. Each contract provides for the Appellant to start on a specified date and continue to provide the services for the duration of the assignment with the contract automatically terminating on completion of the assignment. In other words it envisages a specific assignment. However the Assignment Schedule does not refer to a particular assignment but describes the assignment as "consultant" (contract (a)) or "software consultant" (the other contracts) and also specifies an end date. The Schedule therefore seems to me to change the nature of the contract from carrying out an assignment to a fixed term contract for the provision of consultancy services. The contracts contain the following terms:

   (a) The Appellant is to provide the services set out in the Assignment Schedule, but the schedule does not refer to any services other than the assignment. The services are to be provided on the terms of the agreement and the terms of the upper level contract are incorporated "where applicable."

   (b) The Appellant is named as "consultant"; and Mr Renshaw is named as "Personnel". No changes are to be made to the personnel without RML's consent, which shall not be unreasonably withheld. All personnel must be employees of the Appellant.

   (c) They provide for "5 professional working days" (contract (a)) or 35 hours per week (the other contracts).

   (d) NPI or AMP is named as the client. In each contract he is described as "reporting to" Mike Clark (contracts (a) and (b)) or Matthew Brown (contracts (c) and (d)).

   (e) The Appellant is required to make good at its expense any services not carried out to the client's satisfaction. There is no evidence that this ever occurred and this provision is not reproduced in the upper level contract. It would mean that no payment would be made for the time spent on correcting work and it is not suggested that this occurred.

   (f) The contracts can be terminated immediately by RML if the client no longer requires the Appellant to provide the services.

   (5) During the period in question RML entered into the following contracts with National Provident Institution (NPI) (the upper level contracts): (a) 26 February 2000 to 31 August 2000, (b) 1 September 2000 to 23 February 2001, (c) 24 February 2001 to 31 August 2001, and (d) a final one month oral contract 27 August 2001 to 28 September 2001. Except for a few days difference in the dates there are therefore equivalent lower and upper tier contracts every six months, with a final month. They include the following terms:

   (a) Mr Renshaw is named as the consultant.

   (b) RML confirms that Mr Renshaw will obey any lawful instructions given by NPI.

   (c) The supervising manager is named as Mike Clark (contracts (a) and (b)), or Matthew Brown (contract (c)) who were not based in Cardiff. Mr Clark provided a witness statement but did not give oral evidence. I accept his evidence but bear in mind that he was not cross-examined. He sets out a table of the differences between an employee who was IT Project Manager as an employee, and a Contract IT Project Manager such as Mr Renshaw adding "The roles themselves were essentially the same, requiring the same skills and experience and focused on the same objectives and deliverables." The differences in his table were that the employee had flexible start and finish times with the ability to build up credit and take off up to one day per month; was paid monthly; was paid holiday and sick leave; was a member of the company's non-contributory pensions scheme; had private medical insurance, performance related annual bonus and share option scheme; was employed under a permanent contract until resignation, redundancy, dismissal etc; and was subject to annual performance and competency review, a personal development plan including company-financed training. In contrast Mr Renshaw worked a minimum 7 hours per day (I accept Mr Renshaw's evidence that there was some flexibility here in reality) and could not build up credit; was paid at a daily rate monthly against timesheets; had no paid holiday or sick leave; was not in the pension scheme; had no private medical insurance, bonus or share options; was engaged on typically a 6 months short-term contract, with the offer of a subsequent contract being dependant on business need, satisfactory performance and agreement of rates, contracted via an intermediary who put forward suitable candidates, assisted with rate negotiations and managed the time sheets and invoicing; there were no formal performance reviews, no personal development or training other than on-the-job training of company specifics to enable completion of agreed tasks.

   (d) The assignment is described as team leader (contract (a)), or project management/leader (contract (c))

   (e) The place of work is in NPI's office in Cardiff. The nature of his work on the computer system necessitated his being on site during normal working hours but occasionally it was necessary for him to visit other sites, for example to talk to accounts staff if action needed to be taken to computer systems affecting them. Some work such as writing reports would be done on the train or at home, and he would also make phone calls away from the office using his own mobile phone. He also used his own laptop computer to work on the train.

   (f) A rate of pay per working day is given. Working day is defined as "A working day is normally 7 hours, but the Consultant may be required to work beyond 7 hours on any particular day to ensure the completion of an agreed task." Overtime was not in fact paid although the contract provides for this if requested by NPI, and contract (a) states after "term leader" "(including hours of work and reference to overtime, if applicable)". In practice he normally worked more than 7 hours, particularly when changes were needed, for example on the introduction of stakeholder pensions, or when severe problems needed fixing. There was some flexibility; for example, there was no problem about leaving early if the work was complete, and hours might be varied by agreement with Mr Clark. In practice he would be paid for a half-day of 3.5 hours; there are three examples of this in the summary of time sheets from 9 April 2000 to 6 April 2001. Weekly time sheets (later work sheets, which are virtually identical) were completed with 7 hours even if more were worked and certified by someone at NPI. There was a separate record of the true time spent of each job for planning purposes but I was not shown an example. The only occasion when a separate additional payment was negotiated was over the Millennium when he had to cover New Year's eve.

   (g) Payment was made against time sheets (the change to describing these as work sheets made in the lower level contract was not made in the upper level contract). Invoicing was monthly with payment within 30 days.

   (h) The contract was terminable immediately by NPI during the first six weeks and thereafter on four weeks notice. I accept Mr Summers' evidence that this provision was something that RML negotiated for, which they did not need so far as the lower level contract was concerned as this was terminable immediately on termination of the upper level contract. Contact (c) was also terminable on four weeks' notice by RML.

   (i) Although there is no provision for holidays, in practice during the period from 9 April 2000 to 6 April 2001 he did not work for five weeks plus a few additional days which were presumably holidays, as he said that he did not have any absence for sickness. He would give NPI notice if he were away and some of his work would be covered by a member of the team.

   (j) Contract (c) envisages that NPI may novate the contract with AMP (UK) Services Limited.

   (k) The final month, contract (d), was a hand-over period after NPI or AMP had decided and informed him in June 2001 that the function would in future be dealt with by permanent employees and run from another location. Mr Renshaw was offered the job but declined it as he did not want to be an employee.

   (6) Mr Renshaw's work consisted of leading a team that supported and maintained (including updating to deal with legislative changes) two NPI mainframe computer systems dealing with group pensions, originally the West system and then the Alice system. The work was primarily "fix on fail." Users would report faults to a help desk which logged calls and initially categorised them into four levels of severity based on company guidelines, depending for example on whether the problem affected the whole system or only one person. Such reports might happen 20 times in a day. Mr Renshaw received the log, worked out what needed to be done and he might change the priority categorisation before passing it to a member of his team of six or seven technical programmers to take action (the team was smaller at the end of the period as more of the work was outsourced). The six monthly contracts did not coincide with any particular aspect of the work; there would be computer problems to fix at the beginning and end of each contract. He would give a statistical report every fortnight to Mr Clark, who would also be informed immediately of problems falling into the most urgent category. Mr Clark might sometimes suggest that he copy reports to others who might be affected. Poor performance by a member of the team would in the last resort be discussed with Mr Clark. He discussed salary reviews of members of the team with management. He was not otherwise concerned with career development of members of the team which would be dealt with by a manager. He described as typical day as including considering a print-out of outstanding problems on the train; having an early morning meeting with representatives of the various departments to pick-up on problems; talk to his team to arrange priorities; attend meetings and deal with phone calls; progress problems to a result; negotiate with managers for a suitable time to fix software problems if this meant that the system would be unavailable; he would deal with paper work and phone calls on the train on the way home using his own mobile phone.

   (7) Mr Renshaw had never seen the upper level contracts the terms of which are incorporated by reference into the lower level contracts until the papers were prepared for this appeal. He did not ask to see these at the time they were entered into. While I expect that RML might not want to show him the figures which would show their mark-up they could hardly have refused to show him the terms that were incorporated into the lower level contracts if he had asked. While accepting that he was unaware of them, as the Appellant entered into the lower level contract incorporating its terms I shall take it and Mr Renshaw as having agreed to these terms.

5. Mr Renshaw was an impressive witness and I accept all his evidence. He had been employed by Allied Dunbar for 18 years and he had decided to work in a freelance capacity, but through the medium of the Appellant company. He is a man dedicated to his work and serving his clients, being intent on achieving results for the client, if necessary by working long hours although without additional remuneration. He knew what it was like to be an employee in the past, and now did not have an employee mentality. He was prepared to take the risk of having a series of six-month assignments which might not be renewed in order to receive a higher rate of remuneration than he would receive as an employee, although he lost all fringe benefits. The additional risks he was taking were real. He is understandably indignant that the Revenue should treat him indirectly as an employee by the IR35 legislation.

6. Mr Summers gave evidence that he was employed by Resource Control and Management Limited (RCaM) until April 2002 (although his witness statement had originally said 2001) when he joined RML. RCaM monitored and controlled subcontractors and agencies providing them, such as RML, on behalf of, originally, Pearl Assurance and also AMP which took over both Pearl and NPI. RCaM lost that contract to RML in March or April 2001 following which RML wore two hats, their original agency hat, and the new supervisory role that was formerly carried out by RCaM. He said, and I accept, that during the period in question changes were being made to the contractual arrangements. I was shown a contract dated 9 May 2001 between AMP and RML having effect from 1 March 2001 which is the contract under which RML took over RCaM's role, although the copy I saw did not have signatures. That contract provides in an Appendix for a draft agreement between AMP and an IT Services Agency. I also saw a contract dated 15 September 2002 between AMP and RML but without any signatures and with schedules uncompleted. Mr Summers said that there was an earlier similar verion which could not be traced. It seems that this contract was intended to be used rather than the actual upper level contracts entered into from about 1 March 2001 when RML took over RCaM's role. It is possible but I am unable to make any finding that a similar contract was in use when RCaM were carrying out the supervising function before that date. This evidence is insufficient, particularly as I heard nothing from AMP, for me to find that the 15 September 2002 contract better reflects the terms of the upper level contract from 1 March 2001 and so I am bound to take the contracts that were actually entered into. However, because Mr Robertson placed reliance on its terms I note that it differed from the upper level contracts in the following respects: RML may propose a substitute who needs to be approved in writing by AMP; RML must comply with any timetable or other targets or project requirements as is reasonably required by AMP; RML may exercise a degree of control as to the method of performance of the services and undertakes to use reasonable endeavours to ensure that industry standards are complied with; subcontractors may take leave only with the agreement of RML and AMP; if the contractor is unable to work both RML and AMP must be informed; AMP may terminate the contract on one week's notice during the first six weeks; all clauses are to be represented in the contract between RML and the contractor; the uncompleted schedule provides for an eight hour day and overtime when authorised in advance. I record that the differences would have made no difference to my decision.

7. Before Mr Summers' evidence and in particular before he changed the date mentioned at the beginning of paragraph 6 above I thought that I was being given evidence from RML about the contracts entered into with NPI. I realised that Mr Summers was not concerned with RML except in RCaM's supervisory capacity before 1 March 2001 and then not at all until April 2002 when he joined RML. Bearing in mind that Mr Renshaw was unaware of the terms of the upper level contracts I gave Mr Robertson the option of calling further evidence and in the circumstances I agreed to Mrs Quinn of RML giving evidence by conference call. Mrs Quinn confirmed the existence of the changes to the arrangements mentioned by Mr Summers but could not recall the contractual position.

   Legislation

8. Regulation 6(1) of the Social Security Contributions (Intermediaries) Regulations 2000 provides:

   "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 Contributions and Benefits Act [the Social Security Contributions and Benefits Act 1992] as employed in employed earner's employment by the client."

   "Intermediary" is defined in Regulation 5 and it is common ground that the Appellant is an intermediary for this purpose.

   Preliminary points

9. Mr Robertson raised four preliminary points. First that as the notice that the Regulations applied has not been sent to NPI, it was invalid. Secondly, that the client was RML and not NPI and the notice was invalid for naming the wrong client. Thirdly, it was the Revenue's duty to obtain evidence before making a decision on status. Fourthly, that the delay had prevented him from obtaining evidence from those at NPI.

10. Regulation 3 of the Social Security Contributions (Decisions and Appeals) Regulations 1999 requires that a decision "must state the name of every person in respect of whom it is made," who is the person who can appeal it. Regulation 4 states that notice of a decision referred to in regulation 3 must be given "to every person named in the decision." No notice was given to NPI which Mr Robertson contended invalidated the notice since NPI are named in the decision. Mr Faulkner contended that NPI were not affected by the decision and so it was not made in respect of NPI who were not required to be given notice. I agree with Mr Faulkner. The decision was made in respect of the Appellant and Mr Renshaw because it affected their national insurance contributions. Although NPI are named so as to make clear to what relationship the notice applied the decision is not made in respect of NPI and so there can be no purpose in requiring them to be given notice. The reference to persons named must be construed as persons affected by the notice who are named in it. Commercially the relationship with NPI may have been affected because if the Regulations applied the Appellant has to pay national insurance contributions that it was not expecting to pay. But legally NPI was in the same position whether or not it applied. It would continue to pay RML the same amount, although they might seek to renegotiate the amount in the next contract. I consider that the notice was valid.

11. On the question of who is the client, Mr Robertson contended that as RML acted as a principal they were the client. Before RML took over RCaM's supervisory role on 1 March 2001, by which time contract (c) was already in force, RML's role was only that of introducer. The lower level contracts name the client as NPI (or AMP in contracts (b) and (c)) as the "Client," defined as "the person, firm or company requiring [RML's] services." Mr Renshaw was working at NPI's premises managing a team dealing with their computer. His services were performed, in the words of Regulation 6(1)(a), for the purpose of NPI's business. It is therefore unarguable that the client can be anyone other than NPI (or AMP). While during the one month's duration of contract (d), RML had a far greater role in managing the agents introducing contractors to NPI (or AMP) the reality was that there was an oral continuation of the contracts naming NPI (or AMP) as the client and Mr Renshaw continued to work on their premises. In my view it is clear that throughout NPI (or AMP) was the client referred to in the legislation.

12. On the third point, Mrs Gibb gave an informal ruling that IR35 applied after receiving the following information: the contracts between RML and the Appellant and Mr Renshaw's "explanation of contract terms." Although a return had been made on the basis that IR35 did not apply she was willing to give an informal opinion as to whether it applied to assist the making of future returns. Before making the decision appealed against she had in addition some further explanations by Mr Renshaw, written answers from Mr Clark and correspondence with Mr Robinson. Mr Robertson cross-examined her at length on the effect of the Inland Revenue manual which states:

    "The officer dealing with the case should establish all the facts necessary to form an opinion of the status. This fact finding exercise is likely to take a variety of forms and may include field visits, interview(s), and examination of documents and contracts."

    Mr Robertson interpreted this as requiring the Revenue to obtain all the facts themselves. It seems to me that his contention is based on a misunderstanding of the law. If the taxpayer wants an opinion it is up to the taxpayer to provide all the information so that the Revenue can form an opinion. In the words of Bingham LJ in R v IRC ex p. MFK Underwriting Agencies Ltd [1989] STC 879, 892f, he must "put all his cards face upwards on the table." If Mrs Gibb did not have enough information to form an opinion she would merely have said that. She was given enough information that, in her view, she could give an opinion, and she was willing to receive more information. In doing so she was acting absolutely correctly. The situation is that the taxpayer knows everything, and the Revenue knows nothing, of the facts. The manual envisages that the Revenue will help by interviewing people but that is where the taxpayer requests the interviews. It is not for the Revenue to go looking for facts that are in the taxpayer's knowledge, particularly so in this case when Mr Renshaw declined to attend an interview (as he is perfectly entitled to do). Any other system would be unworkable.

13. Mr Robertson's point on the delay is really a continuation of his point about the Revenue being obliged to search for information. He says that because the Revenue did not approach RML or NPI in 2001 the information is no longer available because NPI's and AMP's UK operations were demerged and are now administered by HHG plc. It follows from my decision on who has the responsibility to obtain evidence that there is nothing in this point. If the Appellant wanted evidence it could have obtained it at the time.

    Reasons for my decision on whether IR35 applies

14. The IR35 legislation requires one to establish the terms of a hypothetical contract between Mr Renshaw and NPI. Mr Robertson made detailed suggestions as to what the hypothetical contract would contain. Mr Renshaw controls the Appellant and, as is to be expected, there are no express terms setting out their relationship. Treating Mr Renshaw as being party to the Appellant's contracts is therefore straightforward. The lower level contract expressly incorporates the terms of the upper level contract (so far as applicable) and so there is limited scope for conflict between them, and it is relatively straightforward to cut out RML. Doing this results in the following terms for the hypothetical contract between Mr Renshaw and NPI:

    (1) A series of three six months' contracts and a final one month contract.

    (2) Description of the work as team leader, or project management/leader in charge of managing a team, but with no stated assignment.

    (3) Working at NPI's office in Cardiff.

    (4) Reporting to a named supervising manager.

    (5) Working on continuing computer support and maintenance rather than on a specific assignment with a finite life.

    (6) Obliged to obey any lawful instructions of NPI.

    (7) Paid a daily rate for days worked (in practice applied to half a day).

    (8) Working at least 7 hours per day but may be required to work longer to ensure the completion of an agreed task.

    (9) Paid against time sheets or work sheets monthly within seven days (the time limit in the lower level contract).

    (10) Terminable by NPI on four weeks' notice after the first six weeks of each contract, and immediately during the six weeks. Although I have accepted that this was included at the insistence of RML who are not a party to the notional contract, I consider that it should be included in the notional contact as NPI had conceded it and commercially it is of benefit to Mr Renshaw. Since the lower level contracts provide for immediate termination if the client (NPI) does not require the services, the upper level contract must take priority because if NPI no longer required the services of the Appellant it would have to give RML the contractual notice in the upper level contract.

    (11) Not containing any of the usual features of contracts with employees listed by Mr Clark (see paragraph 4(5)(c)).

15. A number of different tests have been developed by the courts to determine whether an employment relationship exists. I list below those relied upon by the parties and I shall briefly set out the contentions of the parties and my findings on how each of them applies to the hypothetical contract:

    Mutuality of obligation. Mr Robertson contends that there was no obligation on the parties to renew the contracts at the end of each six months' term, which is common ground. Mr Faulkner contended that there was full mutuality here. It does not seem to me to be relevant that there was no obligation to enter into another contract on termination of each one. This factor may be relevant to determine whether someone is employed under a single contract where there is an umbrella contract but there are breaks in work when the employer is free not to offer work and not to pay, as in Carmichael v National Power [1999] 1 WLR 2042. In this case mutuality is satisfied by NPI's obligation to pay a rate for a working day throughout each of the upper level contracts subject to their being able to terminate it on four weeks' notice after the first six weeks of each contract. The reality was that there was plenty of work requiring Mr Renshaw's continuing services in managing the team supporting and maintaining the computer system, and this factor points towards an employment relationship.

    Personal service and right of substitution. Mr Robertson contends that there was a right of substitution in the lower level contact which should be treated as incorporated into the hypothetical contract. Mr Faulkner said that this fell short of being a right. Mr Renshaw was the only employee of the Appellant and is the named consultant in both the lower and the upper level contracts. Any change would require (a) the Appellant taking on another employee, (b) obtaining RML's consent (not to be unreasonably withheld) as envisaged by the lower level contract, and (c) renegotiation of the upper level contract. I do not consider that I should imply that the lower level contract term be included in the hypothetical contract because RML did not agree such a term with NPI, although it meant that the two contracts were different, and so there is no evidence that NPI would have agreed if the question had been put to them. More importantly, however, even if the same provision had been in the hypothetical contract it would not have amounted to a right of substitution; it was no more than a possibility envisaged by the contract to which NPI might or might not have agreed, although their consent was not to be unreasonably withheld, and if the Appellant had taken on another employee. The reality was that only Mr Renshaw would do the work. I have accepted Mr Summers' evidence was that even if the Appellant had proposed a substitute, RML would have tried to bring in its own substitute. Mr Robertson also made the point that the contracts did not provide for holidays but in practice these were taken and some of Mr Renshaw's work had to wait for his return, so this cannot be used as an argument in support of substitution. This factor points to an employment relationship.

    Control. Mr Robertson contended that control could cover what, where, when and how the work was done. He contended that NPI merely set the objectives; the nature of he work required most of it to be done in Cardiff; there was no control over the days worked, or how the work was done. Mr Faulkner drew attention to the control clause in the upper level contract. The upper level contract provided that Mr Renshaw must obey any lawful instructions given by NPI and work a seven hour day at NPI's office in Cardiff. Mr Renshaw was left to arrange how his and his team's work would be done but he reported to Mr Clark fortnightly and Mr Clark was kept informed about serious computer problems. In this respect Mr Renshaw was similar to a senior employee who was not told how to do his work but made regular reports of the state of the work. Clearly some control over Mr Renshaw was necessary as he was in charge of a team of NPI's employees.

    In business on own account. Mr Robertson contended that the Appellant was certainly carrying on business and had other letting activities. Mr Faulkner said that the Appellant's other activities would not be relevant to the hypothetical contract. I agree. Mr Renshaw did not do other work at the same time. His only work from 1997 to September 2001 was for NPI. This factor points to an employment relationship.

    Business risk. Mr Robertson pointed to the need to renegotiate the rate of payment in each six monthly contract, Mr Renshaw might have been required to work additional hours without extra payment, there was a risk attached to 7 days credit, he took risks as a director of the Appellant, the contract might have been terminated, and he took out his own insurance. Mr Faulkner contended that these were minor risks. In my view as he could not earn more by working longer hours because the Appellant was effectively paid a daily rate, this is more like an employment relationship. The other factors are unusual for an employee (although an employee paid in arrears takes some risk of non-payment) and point towards self-employment.

    Provision of equipment. This is not a factor that is relevant to this type of work as he was working on NPI's mainframe computer. However, he provided his own laptop and mobile phone, which is more indicative of self-employment.

    Length and number of engagements, and exclusivity. Mr Faulkner contends that the contracts in question are continuous and follow other contracts between the same parties starting in 1997. Mr Robertson contends that lengthy engagements are neutral as long relationships are regularly found in self-employment. I accept that there are genuinely a series of separate contracts with no obligation to renew them. In this case, however, no work was done for other clients and the work does not consist of a series of finite assignments. This factor points towards an employment relationship under a series of separate contracts.

    Payment terms. Mr Robertson contended that the rate of remuneration was higher than for an employee. Although there is no evidence of what an employee would have earned for the same work and one would need to know the cost to the employer of the fringe benefits that an employee would receive, I can accept that NPI paid more under the actual contract that it would have paid an employee because it had the flexibility of taking on the Appellant on a six-month basis as opposed to taking on a permanent employee. But I do not think that helps to categorise the hypothetical contract. Mr Renshaw was paid a daily rate when working and not paid for holidays and sickness which is indicative of self-employment. On the other hand, the daily rate was more similar to an employee in that he could not earn more by working longer hours, which a self-employed person would normally be able to do.

    Provision of benefits. He did not receive any of the fringe benefits listed by Mr Clark. This is indicative of self-employment.

    Rights of termination. I have explained above why I consider that the upper level contract notice period should apply to the hypothetical contract, which is accordingly terminable on four weeks notice after the first six weeks of each contract. This is a slight pointer towards an employment relationship because termination on notice is less usual in self-employment.

    Intention of the parties. It is not possible for the parties to have any intention over a hypothetical contract. However, the actual contracts were necessarily not employment contracts.

    Part and parcel of the orgainsation. Mr Robertson contended that working with NPI's staff was dictated by the nature of the work and so this factor was neutral. Mr Faulkner contended that Mr Renshaw was fully integrated in the NPI organisation working with a team and in reporting to a manager. It seems to me that Mr Renshaw was very much part and parcel of NPI's organisation being the in-house person in charge of a team of people, not only in carrying out the work but being involved with salary reviews and poor performance of members of the team, although not with their career development more generally. He was working on a continuous process of computer support and maintenance rather than being engaged for a particular assignment. The six monthly contracts did not coincide with any particular assignment. This factor is a strong pointer towards an employment relationship. The work was identical to that of an employee; as Mr Clark put it: "The roles themselves were essentially the same, requiring the same skills and experience and focused on the same objectives and deliverables." He was eventually replaced by an employee.

16. Standing back and asking myself would Mr Renshaw be an employee under such a hypothetical contract, the factors that I consider are important in the present case are that he was the person in charge of a team in the sense of having management responsibility for the team, and in turn he was regularly reporting to a manager; that he was carrying out continuous support and maintenance work rather than a specific assignment; that he was paid a daily rate and could not therefore earn more by working longer hours; that he did not work for other clients; and that the arrangement would be terminable on four weeks' notice, all of which point towards an employment relationship. Other factors point away from employment, such as the absence of any usual employee fringe benefits (although in practice he had a normal holiday entitlement), and the method of payment against invoices and work sheets. Some other factors do not seem to me to be important to this question, such as the provision of equipment, and the lack of control over how he did his work. Weighing these all up I consider that clearly he would be an employee. In coming to this conclusion I am fully aware of the different risks involved. Mr Renshaw had absolutely no security at the end of each six months term and the reason that his contract was renewed was no doubt because he was good at his job. But in return he was paid more although against this he received no fringe benefits. To him, the difference in risk of not being able to renew the contract was no doubt very important and made him completely unlike an employee. But IR35 does not seem to pay attention to this as it starts from the actual contractual position and asks one to assume that it is replaced by a hypothetical contract. One therefore looks at each separate six-month contract separately. But the fact that there was actually a continuous series of six monthly contracts unrelated to any particular assignment merely makes the case for looking at this as an employment relationship stronger.

    Concluding remarks

17. I said earlier that I would make some final comments about the preparation of IR35 cases. As Sir Donald Rattee said in Future-on-Line Limited v Foulds [2004] EWHC 2597 (Ch) at [25]: "In my view it is necessary to take account not only of the terms of the actual contractual arrangements between the appellant and [the other parties], but of all the other circumstances in which [the consultant] performed his services for the purposes of [the client's] business in order to test whether, had those circumstances been different only to the extent that the services were provided pursuant to a contract directly between [the consultant] and [the client], [the consultant] could properly be regarded as employed by [the client]." I found myself extremely short of real evidence particularly about the other circumstances in which Mr Renshaw performed his services. Mr Renshaw's witness statement devotes a mere nine lines to "nature of services." The rest of the witness statement is really argument or a description of the contractual position. When, having read all the papers, I started hearing the case all I had about the nature of the work were the two statements which Mrs Gibb had. After Mr Renshaw's evidence in chief I asked if he would describe a typical day as I still felt that I did not have a proper picture of what the case was about. While I appreciate all the work that went into the preparation of the case what would have helped me much more than a survey of employment law would have been a detailed description of the type of work that Mr Renshaw performed throughout the various contracts. By the end of his evidence I had a good idea about this but this type of basic factual evidence should have been available also to the Revenue before the case started. I was even more hampered by the lack of any evidence from NPI, which seems to be a recurring problem with IR35 cases. The client's interests are not the same as the Appellant's and in examining the terms of a hypothetical contract it is necessary to have oral evidence from both parties to such a contract in order to obtain a clear picture. This was particularly the case here where Mr Renshaw had never seen the upper level contracts and the only evidence I originally had from RML was from Mr Summers, who only joined RML in 2002, and the only evidence from the NPI side was Mr Clark's witness statement of less than one and a half pages. What was required was oral evidence to put some flesh on the upper level contract. That would be necessary in any appeal but here there were suggestions that NPI were using an old form of contract that did not reflect the true position and therefore I was being asked to pay attention to an upper level contract dated 15 September 2002 on the assumption that there was an earlier version that could not be found. The Revenue were under the impression that Mr Clark would be called as a witness; the tribunal directed on 14 September 2004 that if he had not consented to give oral evidence within 30 days of the direction the Appellant would make a request for a witness summons. It was also unfortunate that Mr Summers changed a vital date in his witness statement at the start of his evidence which meant that I would have heard no oral evidence from either party to the upper level contract. I gave the Appellant the opportunity of asking an adjournment. Having Mrs Quinn's evidence by telephone conference without any witness statement was very much a second best. I should like to say that I found Mr Faulkner's skeleton extremely helpful. It was clear, succinct and fully cross-referenced to the documents, and his use of different colour paper for different types of contract was most useful. He was faced at the end of the first day with the difficulty that Mr Summers had explained for the first time the relevance of the 15 September 2002 contract that quite reasonably he had treated as irrelevant. The procedural rules are designed to avoid any ambush and they did not work on this occasion.

18. Accordingly I dismiss the appeal.

    JOHN F. AVERY JONES

    SPECIAL COMMISSIONER

    RELEASE DATE: 17 January 2005

    SC 3125/03

    Authorities referred to in skeletons and not referred to in the decision:

    R v IRC ex p. Professional Contractors Group Ltd 74 TC 393

    Express & Echo Publications v Tanton [1999] IRLR 367

    FS Consulting Ltd v McCaul [2002] STC (SCD) 138

    Future on Line v Faulds [2004] EWHC 2597

    Hall v Lorimer 66 TC 349

    Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173

    Massey v Crown Life Insurance [1978] 1 WLR 676

    McManus v Griffiths 70 TC 218

    Morren v Swinton and Pendlebury BC [1965] 1 WLR 576

    Mrs MacFarlane and Mrs Skivington v Glasgow CC EAT/1277/99

    Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612

    Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497

    Secretary of State for Employment v McMeechan [1997] IRLR 353

    Synaptek Ltd v Young 75 TC 51

    Usetech v Young [2004] STC 1671

    Global Plant Ltd v Secretary of State for Social Security [1971] 1QB 139

    WHPT Housing Association v Secretary of State for Social Services [1981] ICR 737

    Stevedoring & Haulage Services Ltd v Fuller [2001]EWCA Civ 651

    Montgomery v Johnson Underwood [2001] IRLR 269

    Propertycare Ltd v Gower [2003] EAT/547

    Clark v Oxfordshire Health Authority [1997] EWCA 4792

    Spring v Guardian Assurance plc [1995] AC 296

    Ansell Computer Services Ltd v Richardson [2004] STC (SCD) 472

    Narich Pty Ltd v Commissioner of Payroll Tax [1984] ICR 286

    Byrne Brothers (Formwork) Ltd v Baird [2002] IRLR 96

    Lime IT v IRC [2003] STC (SCD) 15

    Horner v Hasted 67 TC 439

    Tilbury Consulting Ltd v Griffiths [2004] STC (SCD) 1