United Kingdom Special Commissioners of Income Tax Decisions

Spc00653

Income tax – Worker supplied through intermediaries – "IR 35" – Schedule 12 FA 2000 – Whether circumstances were such that had the services been provided under a contract directly with the worker, the worker would have been an employee – Held : yes

National Insurance – Worker supplied through intermediaries – "UR 35" – SI 2000/727 Regulation 6 – Whether circumstances were such that had the arrangements taken the form of a contract directly with the worker, the worker would have been an employee – Held : yes

THE SPECIAL COMMISSIONERS

M K M COMPUTING LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: CHARLES HELLIER

Sitting in public in London on 26 September 2007

Mr C Whittaker of Odos Consulting, for the Appellant

Mrs C D Cumming, Inspector of Taxes, for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

1. Martin Ellwood is the sole director of, and owner of 50 per cent of the shares of, MKM Computing Ltd ("MKM"). In September 1998 the Appellant agreed to make Mr Ellwood's services available to Proactive Appointments Ltd ("Proactive") a company engaged in the business of making contract workers available to its clients. Proactive agreed with London General Holdings Ltd ("LGL") to make Mr Ellwood's services available to LGL. Mr Ellwood rendered his services as a contract analyst programmer for the benefit of LGL under these arrangements. The arrangements continued as the result of a number of extensions until 2002.
2. On 11 June 2004 the Respondents made a Decision and two Determinations under what is commonly called the IR 35 legislation. They concluded that the circumstances were such that had Mr Ellwood been directly contracting with LGL the nature of the arrangements would have led to the conclusion that he was an employee and accordingly that, under the IR 35 legislation the Appellant was liable to NI and PAYE. The Appellant appeals against that Decision and those Determinations.
3. The Decision appealed against relating to National Insurance Contributions and is:

"That Mr M Ellwood is treated as an employed earner in respect of his engagement with MKM Computing for the period 6/4/2000 to 5/4/2002. That MKM Computing Ltd is liable to pay primary and secondary class one contributions in respect of the earnings from that engagement.

The amount MKM Computing is liable to pay in respect of this engagement is £6,316.45."

4. The Determinations appealed against relate to PAYE. The first is for the year 2000-01 and is for £8,086.40; the second is for the year 2001-02 and is for £13,012.00.
5. There was no dispute as to the amounts involved. The only issue before us was whether the conditions in the relevant pieces of legislation for the making of the Decision and Determinations were satisfied : in particular whether, had Mr Ellwood contracted directly with LGL, he would have been an employee.

The Statutory Provisions

6. For the relevant periods the legislation relating to direct tax was contained in Schedule 12 FA 2000. It provided so far as relevant to this appeal that where an individual or an associate receives from an intermediary (it is agreed that the Appellant is an intermediary for those purposes) or has rights to receive from an intermediary a payment or benefit not taxable under Schedule E then the intermediary is to be treated as making a payment chargeable to Schedule E of the amount of that payment or benefit. The provision apply where para 1(1) Schedule 10 applies, namely:-

"(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")".

Pausing there, this provision was satisfied. Mr Ellwood personally performed services for the purposes of LGL's business.

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

Pausing again, this condition was also satisfied: Mr Ellwood had no contractual relationship with LGL. His services were provided under arrangements involving the Appellant and Proactive. Each of them were third parties.

"(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."

It was this last condition which was in dispute in the appeal.

7. Before leaving the income tax provisions of Schedule 10, I should note the provision of paragraph 1(4):

"(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."

8. The National Insurance provisions to be found in regulation 6 of SI 2000/727 provide that a worker will be treated as in employed earner's employment and receiving benefits calculated in accordance with regulation 7 of that statutory instrument where the three conditions in regulation 6(1) are satisfied. Subparagraphs (a) and (b) of regulation 6(1) are identical to subparagraphs (a) and (b) of paragraph 1(1) Schedule 10 set out above. Paragraph (c), the third condition, is, strangely, phrased differently:

"(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 as employed in employed earners employment." (My italics).

9. There is to my mind a potential difference between the effect of paragraph 1(1)(c) Schedule 10 and regulation 6(1)(c). It is this: regulation 6(1)(c) appears to require the notional contract between the client and the worker to be constituted by the arrangements: "had the arrangements taken the form of a contract". Thus potentially there is no requirement to consider whether anything else would have been included in the notional contract. By contrast paragraph 1(1)(c) Schedule 10 may require a wider enquiry into what the terms of a direct contract between client and worker would have been had there been such a contract: there is no limitation in the words "if the services were provided under a contract directly between the client and the worker" to contract terms which are encompassed in the arrangements or the circumstances.
10. In Usetech Ltd v Young (HM Inspector of Taxes) 2004 TC 811, Park J did not however see any difference between the two formulations. At paragraph 35, after reciting the relevant extracts he said:

"The two wordings are not identical, but the meanings are. There was not a direct contract [between the parties in that case] but the provisions require it to be assumed that there was. What would it have contained? …".

It seems to me that Park J is there saying that both provisions require a determination of what such a contract would have contained from a consideration of all the circumstances, rather than the construction of a contract whose content is limited to the arrangements. At paragraph 9 he says:

"subpara (c) involves an exercise of constructing a hypothetical contract which did not in fact exist, and then enquiring into what the consequences would have been if it had existed. There may be room in some cases for dispute about what the hypothetical contract would contain, and in the present case there is …".

11. On the other hand, in Synaptek v Young (HM Inspector of Taxes) (2003) 75 TC 51, Hart J seemed to adopt the more limited approach. That case however dealt only with the provision of regulation 6 and Hart J makes no reference to the corresponding provisions of Schedule 10. At paragraph 11 he says:

"… The inquiry which Regulation 6(1) directs is in the first instance an essentially factual one. It involves identifying first, what are the "arrangements involving an intermediary" under which the services are performed, and, secondly what are the "circumstances" in the context of which the arrangements have been made and the services performed. The legal hypothesis which then has to be made is that the arrangements had taken the form of a contract between the worker and the client." (my emphasis).

This is potentially a different approach to considering what would the contract have contained? It seems to me that this difference exists at least in theory even when it is acknowledged that the `arrangements' are not limited to the words of the formal contracts between the relevant parties but include all relevant circumstances (see para 47 in Usetech). What actually happened will be part of the arrangements: the practice may indicate a variation in the formal agreements it may also illuminate the formal agreements or indicate something which falls short of contractual rights and duties. But even where account is taken of all the actual arrangements there may be a difference between the notional contract formed by encapsulating those arrangements and the notional contract whose terms would be determined by asking "What would have been agreed?"

12. I shall return to this issue later but I note that Park J, at paragraph 1(4) said: "However no-one has suggested to me, nor do I consider, that that [difference] or the other minor differences between the two statutory provisions affects this case or open a possibility of the case being decided one way for NICs and another way for income tax and corporation tax."
13. I now turn to the facts to identify the "arrangements" involving the intermediary and the circumstances in which those arrangements existed and the nature of the services provided by Mr Ellwood.

The Evidence and Findings of Fact

14. I heard oral evidence from Mr Ellwood and from Paul Jarrett who was IT Director at LGL during the relevant period. Both provided witness statements. I also had before me a statement of facts not in dispute, copies of contracts and their extensions between the Appellant and Proactive, and between Proactive and LGL. There were also copies of invoices, of a note of a meeting between the Respondents' officers and Mr Jarrett, and of some correspondence between the Appellant on LGL in 2002. I set out below my principle findings of fact.

Mr Ellwood, the Appellant and LGL

15. Mr Ellwood was the sole director of the Appellant. He holds 50 per cent of its shares. His wife was the company secretary and the only other employee. She held the other half of its shares.
16. Mr Ellwood is a skilled analyst programmer. His particular expertise lies in programming mid-range computers. The services he performed at LGL related to those types of computer. His personality and skills were much appreciated by those at LGL.
17. LGL's business includes the provision of databases for the insurance business of its clients. There are entities such as Comet, Toyota or motor traders who provide warranty or insurance packages. Its business includes fronting calls for the public purchasers of their clients' products. The demands of its clientele changed rapidly and demands were often made for new and different services. The IT department had to react speedily to the clients' demands. This lead to peaks and troughs in the demand for the services of analysts and programmers. Its IT department had permanent employed staff. At times of greater demand these people were supplemented by external resource in the form of contractors. LGL used Proactive to obtain such contractors.
18. MKM advertised in yellow pages, had its own notepaper and website and prepared accounts which properly encompassed the income from LGL. From 25 February 2002 Mr Ellwood had the use of a laptop computer provided by MKM.
19. There was no evidence that MKM had undertaken any other material activity in relevant period other than providing Mr Ellwood to Proactive. MKM had no other employee with Mr Ellwood's skills.

The contracts

20. On 16 September 1998 Proactive wrote to LGL confirming that, on the basis of their attached Terms and Conditions they would provide the services of a Contract Analyst Programmer. The letter then set out the following:

"Name of Contractor: Martin Ellwood

Position: Analyst/programmer

Start Date: 21 September 1998

Finish Date: 19 March 1999

Contract period: 26 weeks

Notice period: 4 weeks from either party

Hours per week: 37½ hours

Hourly rate: [£ a specified sum]"

The terms and conditions attached included the following provisions:-

"3. … d) [Proactive] may terminate the Assignment of [LGL] is in wilful default … becomes insolvent or of a petition is appointed for its winding-up …

(e) [Proactive] reserves the right to replace the Worker [defined as `staff assigned from time to time by [Proactive] to provide services for [LGL]] with another of similar ability and experience should for whatever reason the current worker be unable to complete the Assignment. The replacement Worker to be mutually approved by [LGL].

(b) It is the responsibility of [LGL] to supervise and control the Worker; to ensure that the Worker undertakes the work for which he or she was hired; to make sure that safe working conditions are provided; to ensure that the Worker is adequately covered by insurance whilst the Worker is in the employ of [LGL]."

21. There are also provisions relating to timesheets, invoices, payments, confidentiality and the poaching of the Worker by Proactive's client.
22. Shortly before the end of the contract period set out above an extension of the contract for 26 weeks was agreed. Subsequent contiguous extensions of varying lengths were agreed which ran until 29 March 2002. Neither of the parties were compelled to offer or accept any extension.
23. On 17 September 1998 (the day after the date of Proactive's letter to LGL described above) Proactive and the Appellant signed a written form of contract. The document was headed:

"Contract between MKM Computing Limited

for the services of Martin Ellwood

and

Proactive Appointments Limited"

The front page then provided:

"This contract confirms [Proactive's] agreement with you that MKM Computing Limited … will provide services to and for the benefit of the undermentioned Client based on the Terms and Conditions below and attached.

Name of Company (the Client) [LGL]

…

Position ("The Assignment") Contract Analyst Programmer

Report to David Wainwright

Start Date 21 September 1998

Final Date 19 March 1998

Hourly Rate £ [so much] per hour

Weekly Hours 37½ hours

Length of Contract 26 weeks

Notice Period 4 weeks from either party".

24. The attached Terms and Conditions appear to be in a standard form and to envisage more than the one Assignment described on the front sheet. There are provisions relating to the provision of time sheets signed by the Client and for the payment of fees – which "will be delayed no longer than 1 month." Payments may be withheld if MKM fails to work to the required standard or is unable to complete the assignment. MKM is required to have Employer's Liability and Public Liability Insurance. Clause 9(d) provides that Proactive may terminate with pay in lieu of notice in the event of unsatisfactory work by MKM's staff. There are restrictions upon MKM or its "staff" supplying other services to the Client.
25. Shortly before the Finish Date set out on the front sheet an extension of the contract for 26 weeks was agreed. Subsequent contiguous extensions were signed which ran until 29 March 2002. Neither party was compelled to offer or accept any extension.

The Work Done

26. In the period 8 April 2000 to 6 April 2002 MKM delivered, with 9 exceptions, weekly invoices to Proactive. The exceptions related to weeks when Mr Ellwood did not work because, for example, he was on holiday. The majority (55 out of 94) of the invoices were for 37.5 hours work with a normal range of between 30 and 39 hours. The arithmetic mean was 37.8 hours for those weeks he worked. The invoices were for `Programming Services' and specified the number of hours and rate per hour.
27. At LGL Mr Ellwood worked within a team. A team had a project manager. 6 project managers reported to Mr Jarrett, the IT director. Mr Ellwood was allocated tasks by his team manager. There tasks included: understanding the user requirements by speaking to client managers and employees, drafting requirement documents, writing software, developing software, testing software, carrying out quality assurance and installing the software. The allocation of the tasks did not include instruction as to how to perform them.
28. Mr Jarrett would generally use contract staff for particular projects. Permanent employees were allocated tasks more fluidly. Mr Ellwood worked on a succession of such projects in the relevant period. Each contractual period related to one or two projects only. The periods of renewal of the proactive/LGL contract sometimes did and sometimes did not encompass the time actually needed to complete a particular project.
29. Mr Jarrett, having decided that he needed extra contract staff would arrange for an agency like Proactive to supply them. Generally the nature of project for which he required staff would be communication to the agency. Towards the end of the period of a contractor's contract there would be a telephone conversation with the agency about renewing the contractor's contract. Mr Ellwood would hear formally from the agency if a renewal of the contract was being offered, but would as the result of informal conversations at LGL have some idea of whether it would be and what projects would be involved. In the relevant period the contract was extended some 13 times.
30. The period for any extension was fixed by Mr Jarrett by reference to his estimate for the time needed for the work he had in mind. He would reach that estimate by discussion with those involved at LGL including at times the contractor who might be involved in the project. Mr Ellwood was involved in some discussions for future projects in which he became involved. Where a project over-ran its estimate the contractor's contract might be extended. This happened with a number of the projects on which Mr Ellwood was involved.
31. If a project were to finish early or looked likely to do so Mr Jarrett would have contacted the agency and told it that he would find something else for the contractor to work on.
32. Although when working at LGL Mr Ellwood would spend his time principally on the project or projects which had been assigned to him he would occasionally be asked by people at LGL to help on other matters: for example if a problem arose in relation to something he had previously been involved in; and generally, after consulting Mr Jarrett or the project manager, he would supply the help required as part of his contracted hours.
33. As part of the discussion of a new project with Mr Ellwood there would be discussion of any holiday he wished to take in the projected period for the project. There would be some give and take bearing in mind the LGL time constraints and Mr Ellwood's need for a holiday. Having settled the period he would take as holiday the period for which the contract would be extended would be fixed. He did not submit invoices for those days on which he was on holiday.
34. Mr Ellwood generally attended LGL's premises on working days between 6.45am and 3.30pm. He liked to leave early to avoid the traffic. He said that the client "was sympathetic to traffic difficulties and would let me go early." It was necessary for his work that he was at LGL when others were there : there would be matters he would need to discuss and clarify with other people at LGL. He did not, and was not expected to wander in and out as he pleased.
35. The LGL computer systems were fairly reliable and crashed infrequently. If the system crashed then everyone including Mr Ellwood would sit around for a bit, perhaps read a technical magazine or twiddle their thumbs. Likewise if he arrived at LGL and the overnight back-ups were running late. If Mr Ellwood was in a good mood on such an occasion he said he would not count the downtime as hours to be billed; if he was in a bad mood he said he would charge. I accept that evidence. Given his regular working hours and the consistency of his billed hours I conclude that generally payment was made in respect of such down or unavailable time.
36. If Mr Ellwood's work was defective (he recalled only one such occasion) he would rectify it in his own time.
37. In the Autumn and early winter of 2001 Mr Ellwood was engaged under two 13 week contract extensions for which in each case one of the two specified projects was the EMS Australia Project. After the work had been done on the project in the UK Mr Ellwood went, at Mr Jarrett's instigation, to Australia to train the local personnel and to implement the system which had been written. His expenses of travel were paid by LGL. While he was there he had regular telephone contact with Mr Jarrett, reporting to him how the work was going, Mr Ellwood had prepared a plan and he let Mr Jarrett know how progress was being achieved by reference to that plan. Mr Jarrett said he saw his role as offering help, and, where necessary, the facilitation of help and assistance from elsewhere in the organisation. It was clear to me that Mr Ellwood had been asked rather than commanded to go to Australia, but also clear that Mr Jarrett was monitoring and would guide what he was doing.
38. If the approach of a deadline meant that it might be desirable that more than 37½ hours be spent on a project in a particular week, Mr Jarrett would discuss the need with Mr Ellwood. Mr Jarrett did not feel able to compel Mr Ellwood to work additional hours but would expect an amicable helpful result.

Control

39. Once Mr Ellwood had been given a project he would get on and do it. He was not subject to detailed orders as to how to do what and when. But he was part of a team: he reported his progress to Mr Jarrett or other project managers and discussed what he was doing with other members of the team. Although these interchanges did not consist of giving orders it was clear to me that they would have affected what he did, when he did it, and how he did it.
40. If Mr Ellwood wished to take an unscheduled holiday he would discuss it with the relevant personnel at LGL. Mr Jarrett said, and I accept, that there had been an occasion when he had refused a day off when they had been really up against a deadline.
41. Mr Ellwood's computer programme coding was not reviewed for quality and he was not subject to the employee appraisal system. If his work was deficient he would not be offered a new contract.

Substitution

42. Before the commencement of the first contract Mr Ellwood was interviewed by a member of LGL's staff. He was asked some technical questions. Mr Ellwood described part of the interview as a check that he had not yet two heads.
43. In a document prepared by Mr Ellwood on 2 April 2002 and signed by Mr Jarrett on 5 June 2002 the relationship between MKM and LGL was described thus:

"[MKM] has the right to provide a substitution worker in addition to or in place of Martin Ellwood. If a substitute worker were to be proposed [MKM] would be required to satisfy [LGL] that the substitute has the necessary skills, qualifications and experience …"

In the relevant period there was no occasion when Mr Ellwood sent or proposed a substitute for himself.

44. In the course of a meeting with Respondents' officers Mr Jarrett, having been asked what would happen if one day Mr Ellwood said he was going on leave and would send someone in his place, replied that that conversation just would not happen. In cross-examination Mr Jarrett said that if the conversation started his response would depend on the circumstances. Generally he would expect a new contract to be entered into with the agency. If Mr Ellwood were not to turn up he would contact the agency. If the agency sent a Mr Smith and if, having met him, Mr Jarrett decided that Mr Smith was OK he would expect a new contract with the agency for the provision of Mr Smith. In deciding whether or not to accept Mr Smith, Mr Jarrett said it would have been relevant that Mr Smith was from MKM because Mr Ellwood might well have communicated his knowledge of MKM to Mr Smith: it would give Mr Smith an advantage.
45. Mr Jarrett said that he would not have been concerned if Mr Ellwood had arranged for Mr Smith to conduct some of the work off LGL's premises: if it contributed to the project being done in time he would have been happy. If Mr Jarrett "was not paying it would be no cost" to him and he would not mind.
46. Mr Ellwood said in evidence that he regarded the right for MKM to substitute another person in place of himself as an implicit right in the contract between MKM and Proactive. If for example he had been ill and unable to go to LGL but had found a substitute he would have rung the agency, offered the substitute and proceeded from there.
47. My conclusion is that LGL's management regarded the arrangement it had with Proactive as being for the supply of Mr Ellwood's services only. That was whom they interviewed, and whom later they knew: that was who they thought they would get. Whilst they would consider any proposed substitute they did not regard themselves as being bound to do so, and even if a proposed substitute were interviewed and found acceptable they did not regard themselves as bound to accept him (although had Mr Ellwood been truly unable to perform the expected duties and an acceptable substitute been offered by Proactive I believe that they would have recognised their obligation under clause 3(d) of the Proactive/LGL contract to accept that substitute in place of Mr Ellwood). I found the demeanour and oral evidence of Mr Jarrett on this question more convincing that the statement quoted above signed by him on 5 June 2002: in particular his oral insistence that a substitute would be subject to a new contract indicated to me that he did not regard Proactive as having even a limited right of substitution (but that was without consulting the detailed terms of the Proactive/LGL contract).
48. I find that the highest that Mr Ellwood's expectation can be put at the relevant time is that he had a confident expectation that if he was ill and could find a suitable substitute it was very likely that that substitute would be accepted by LGL. As regards MKM's relationship with Proactive I find that Mr Ellwood would have regarded the question as determined by the terms of the Proactive/MKM contract properly construed.
49. Other Matters

(i) No payment was due or was made under any contract when Mr Ellwood was sick or on holiday.

(ii) LGL provided no training for Mr Ellwood. He kept abreast of technical developments by reading in his own time (apart from reading during occasional downtime of the LGL computers) magazines MKM purchased, and on the internet.

(iii) There was no canteen at LGL. There was a vending machine which Mr Ellwood was able to use.

(iv) Free coffee was available to Mr Ellwood in common with other employees in the early morning.

(v) LGL had car parking facilities. These were limited in number. They were available only to employees once they reached the top of a waiting list. Mr Ellwood was not entitled to use the car parking facilities or to join the waiting list.

(vi) In common with other employees Mr Ellwood had an e-mail address at LGL.

(vii) Unlike employees Mr Ellwood had no right to use the social and sports club.

(viii) Mr Ellwood worked in an open plan office at LGL alongside other employees of LGL. The vast majority of his recorded time was spent working at LGL's premises, although he did work at home, and there was the trip to Australia.

(ix) Mr Ellwood was not required to provide and use a laptop by LGL nor did it provide one. But, latterly, he used a laptop provided by MKM.

(x) Unlike employees Mr Ellwood was not subject to the LGL appraisal process.

(xi) Mr Ellwood would have been invited as a guest to the Christmas office function but not automatically invited by the LGL HR function as an employee would have been.

(xii) Mr Ellwood completed weekly time sheets which were approved by a member of LGL's staff such as Mr Jarrett and then sent to Proactive. On the basis of the time sheets MKM would invoice proactive. Staff who were LGL employees were clearly not subject to these procedures, although, like contractors, they did record their time against projects for management accounting purposes. These records were reviewed by Mr Jarrett as part of his overall control of the projects.

(xiii) It would not have been possible for a substitute sent by Mr Ellwood in his place to get into LGL's building to go to work at Mr Ellwood's desk without the prior issue of a relevant pass.

(xiv) Mr Ellwood worked for no one else in the relevant period.

The Case Law Tests in relation to Employment

50. I was referred to a number of cases on the difference between a contract for service and a contract of services. I take from them the following principles:-

(i) There is an irreducible minimum for a contract of employment. That minimum was described in Ready Mixed Concrete v Minister of Pensions and National Insurance (1967) 2 QB 497, MacKenna J there set out three necessary conditions for a contract of services:

"(i) [the mutuality test] The servant agrees that in consideration of a wage or other remuneration, he will provide his own work and shall in the performance of some service for his master;

(ii) [the control test] 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 inconsistency test] the other provisions of the contract are consistent with its being a contract of service."

These tests are a good starting point when considering whether a contract is one of employment and it is important that mutual obligation and control are identified before moving on to consider other factors (see Buckley J at paragraph 23 in Montgomery v Johnson Underwood Ltd (2001) EWCA Civ 318). Whilst the tests are necessary conditions for employment the nature and extent of the requirements for mutuality and control are not rigid but depend upon the circumstances. I discuss this below. MacKenna's third condition has to my mind much in common with the overall picture and in business on his own account tests I describe below. In particular the third test the inconsistency test seems to me to be capable of embracing the `overall picture' approach and the use of the various indicia. But the mutuality test and the control test require some further comment.

(ii) Mutuality. There are two aspects to this. First that there is some mutuality of obligation. Second that the contract is for "his own work" – for his personal service. The second aspect gives rise to the question as to whether a right for the taxpayer to substitute another person in his place can prevent a contract being one for service. I discuss that below. The first aspect clearly covers the requirement that there be an obligation on the one hand to work and on the other to remunerate. The more difficult question is whether there is or it also encompasses an obligation for the employer to provide work (or to pay when there is no work to be done). It seems to me that the former is a condition for there to be employment; the latter a strong pointer towards employment. (See Cornwall County Council v Prater 2006 EWCA Civ 102 per Mummery LJ at paragraph 40(5), Longmore LJ at paragraph 43 and Lewison J at paragraph 51; by contrast Park J in Usetech regards an employer's obligation to provide work or to pay if there is none as a "touchstone" of employment – see paragraph 60.)

(iii) Substitution. The contract must be for personal service. Nevertheless a limited or occasional power of delegation or right to substitute another person may be consistent with a contract of personal service. (Usetech : paras 49-52). In particular it seems to me that a contract containing a right to substitute if and only if the `employer' consents is, until consent is given a contract which plainly satisfies the personal service condition, although the presence of that right may be an indicium which points towards self-employment.

(iv) Control. MacKenna J says "control in a sufficient degree to make that other the master". That is no indication that absolute control is required. In Morren v Pendlebury Borough Council (1965) 1 WLR 576 Parker C J indicates that in the case of a professional person there can be cases where there is no question of the employer telling him how to do the work in the absence of control and direction "in that sense" can be little, if any use, as a test. It seems to me that something which can be called control is a necessary feature of an employment relationship even one for a skilled employee; but the nature of the power of control which suffices may differ with the nature of the job: the hospital will tell the surgeon to try to meet the targets; the company will tell the ship master where to take the ship; the school governors may tell the headmaster or headmistress how many staff he or she may engage.

(v) Having considered whether these conditions are satisfied, the tribunal should then consider all the circumstances and in doing so may use the following tests and guidance.

(vi) To ask whether the taxpayer is in business on his own account? (Market Investigations Ltd see below)

(vii) "In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person's work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and making an informal, considered qualitative appreciation of the whole … Not all details are of equal weight … The details may also vary in importance from one situation to another." (Hall v Lorimer (1993) 66 TC 349 at 375F.)

(viii) Nevertheless the consideration of certain indicia which may point one way or the other may be helpful in considering that picture. (Lee Ting Sang v Chung Chi-Keung 2 AC 374, and Hall v Lorimer). Those indicia include those mentioned by Cooke J in Market Investigations Ltd v Minister of Social Security (1969) 2 QB 173. The following may therefore be relevant:-

(a) does the taxpayer provide his own equipment?

(b) does the taxpayer hire his own helpers?

(c) what degree of financial risk or opportunity for profit does the taxpayer have?

(d) what degree of responsibility for investment and management does the taxpayer have?

(e) is the taxpayer part and parcel of his "employer's" organisation see Hall v Lorimer);

(f) the degree of control to which the taxpayer is subject;

(g) termination provisions – termination on notice may be a pointer towards employment in some cases (it was found to be so in Morren v Swinton (1965) 1 WLR 576 but found to be neutral in McManus v Griffiths 1997 70 TC 218);

(h) the intention of the parties; and

(i) the extent of mutual obligations and of the "employer's" obligation to provide work or pay in lieu of so doing.

Discussion

51. I shall now consider first what the terms of the hypothetical contract between LGL and Mr Ellwood would have been, and then consider, against conditions for, and the indicia of, employment and self-employment developed in those cases whether, the circumstances were such that if that hypothetical contract were in existence, Mr Ellwood would have been an employee of LGL. I have endeavoured to take into account the submissions of the parties in the discussion below without rehearsing them in detail. Mr Ellwood was the sole director of MKM it seems to me as it did to the Special Commissioner in Netherlane [2005] SpC 457 proper in the absence of any form of contract between him or MKM, straightforward effectively to treat him as a party to the Appellant's contract in conducting this exercise.

The notional contract

52. It is important to consider the terms of the notional contract because some of the more important conditions for, and indicia of, employment or otherwise flow from the legal rights and duties of the parties rather than from the general nature of the relationship between the parties.
53. I start by asking myself the question posed by Park J at paragraph 35 of his judgment in Usetech: had there been a contract between LGL and Mr Ellwood, "What would it have contained?" but I note below when the alternative approach would give a different result. In my view there would have been a series of fixed term contracts each of which would have contained the following provisions:-

(1) It would be for a fixed term (mirroring for each engagement the term of the corresponding contracts between Proactive and LGL, and Proactive and MKM).

(2) It would be terminable early (a) on 4 weeks notice from either party. That is because the contract confirmation letter between Proactive and LGL provides for 4 weeks' notice from either party, and the front page of the Proactive/MKM contract made the same provision. There would also be provision for termination in other circumstances such as default, insolvency or misconduct.

(3) It would be for Mr Ellwood to work as an Analyst/Programmer on the projects specified for the assignment. This seems to me to be clear from (i) the definition of Assignment in the Proactive/LGL contract:

"The Assignment – means the services which have been specified by [LGL] to [Proactive] and are allocated by Proactive to the Worker for performance",

(and the corresponding definition in the Proactive/MKM contract), together with (ii) my factual finding that LGL did indicate to Proactive, and Mr Ellwood knew, the project for which the worker was required. I come to that conclusion despite the absence of any express requirement in either contract that the Assignment be performed. That requirement is to my mind implicit in both contracts and was what happened in practice. The contractual requirement would be to work on the projects, not for the delivering of a completed project.

What I have said hitherto under this heading flows directly from the arrangements (reflecting the formal agreements and the obligations undertaken in practice) but if I am asking the question : what would have been contained in such a contract? There would in my view have been a further requirement namely for Mr Ellwood to provide assistance in such other matters as might arise from time to time within Mr Ellwood's competence but only for a small part of his working time.

(4) Except for periods of holiday specified in the contract or later agreed by LGL and periods of sickness Mr Ellwood would work on average for about 37½ hours each week. He would be paid at the hourly rate for the hours worked. (I deal at (8) below with the question as to whether he would be paid for working or being available to work.)

Whereas both the Proactive/LGL and Proactive/MKM contracts specify Hours Per Week of 37½, it was clear that these provisions had been varied by the conduct of the parties: holidays were factored into a contract renewal (and not treated as hours of work) and the actual hours varied around the 37½ hours figure.

(5) Mr Ellwood would work at LGL's premises using LGL's computer systems during hours when those computer systems were generally available and for hours which permitted the discussion and interaction with other people at LGL necessary for the projects he was assigned.

This term is not in the Proactive/LGL contract. (There is a requirement however in clause 7(a) of the Proactive/MKM contract to conform to LGL's normal hours of work.) But it was clear that Mr Ellwood could do the tasks assigned to him only if he was on LGL's premises during fairly normal working hours on most days. That is what was expected and what happened. It was a necessary term of the arrangements. As part of the arrangements it would have been part of a direct contract on either view of the legislative requirement.

Mr Ellwood could also work at home when he could do so effectively.

In relation to the REMS Australia project Mr Ellwood would be required to work in Australia for part of his time on the project.

(6) Mr Ellwood would submit weekly time sheets showing the hours worked in a particular week and would be paid at a fixed hourly rate for that work within 2 months of the end of each month worked. (This follows from clauses 4 and 8 of the Proactive/LGL contract and clauses 4 and 5 of the proactive/MKM contract and what happened in practice.)

(7) There would be no express contractual right to BUPA, PFI, Pension, Sick Pay, Holiday Pay, car parking benefits, or staff parties.

(8) Periods when no work was available.

There is no express provision in the Proactive/LGL of the Proactive/MKM contract dealing with this issue. Whilst those contracts provide for 37½ hours work per week it is clear that that provision was varied by conduct (see paragraph 26 above) so that somewhat more or less than those hours were worked and paid for. The contracts refer to an Assignment but do not expressly limit the work to be done to the assignment and in practice work was done (and the hours paid for) outside the particular assignment. The notice period of 4 weeks could be indicative of an obligation on LGL to continue paying so long as Mr Ellwood turned up even if the expected work had dried up. The evidence before me was that there had not been a situation in which the work had completely dried up so there was no practice to illuminate the agreement.

Mr Jarrett in his evidence gave me the impression that he saw the 4 week notice period as a protection available to LGL if the work dried up. That was indicative of a presumption that LGL would be liable to continue to pay so long as Mr Ellwood turned up. Mr Ellwood's own fair and candid evidence that when LGL's computer was down he would sometimes charge for his time was an indication that to some extent he regarded the arrangements as providing for continuing payment even when the work dried up. On the other hand he said that if the work were to have dried up he would have `backed off' and agreed to early termination.

The early termination provision of the LGL/Proactive contract enabled LGL to terminate even if the work had not dried up but also provided a measure of protection for Mr Ellwood (and Proactive) in the 4 weeks' notice. It seems to me that the notice period together with the description of the essential terms of the contracts on the first schedules suggest that payment would continue to be made if Mr Ellwood was available to work even if no work was in fact available. On this basis and in view of the actual approach of the parties it seems to me that the arrangements provided for payment for a maximum of 37½ hours in a week so long as Mr Ellwood turned up and was available to do what was allocated to him.

And, if one asks Park J's broader question "What would the contract have contained?" then I believe that each of the fixed term contracts would have contained provision for payment if there had been no work to do. That was how Mr Jarrett appeared to view the contract – that was why he would have sought another project for a contractor if his assigned project ceased – and that was the importance of the 4 week notice period for him. If a direct contract had been negotiated that is what it would have contained.

(9) Control

Clause 7(a) of the Proactive/MKM contract provides that MKM agrees:

"To co-operate with [LGL]'s staff and accept the direction supervision and instruction of any person in [LGL]'s organisation to whom it is responsible …".

Clause 3(b) of the Proactive/LGL contract provides that it is:

"the responsibility of [LGL] to supervise and control the Worker …".

The evidence before me led me to the conclusion that Mr Ellwood had not in practice been given orders but in the course of a project to which he was assigned his interaction with others within LGL affected what he did, when he did it and how he did it.

Whilst the covenant in clause 7(a) above is given by MKM it seems to me that it can be taken as applicable to any person MKM supplied and would be applicable to Mr Ellwood as MKM's supplied worker.

Whether one considers simply a contractual embodying of the arrangement or what would have been included in a national contract, I conclude that at a very minimum the hypothetical contract would have required Mr Ellwood to report his progress regularly to persons at LGL, to discuss with such person the content and progress of his work, and to co-operate with them and to adapt the course of his work so as to ensure the most effective progress of the work he was doing as a result of those consultations and discussions.

(10) Substitution

Clause 3(e) of the Proactive/LGL contract provides that:

"[Proactive] reserves the right to replace the Worker with another of similar ability and experience should for whatever reason the Current Worker be unable to complete the Assignment. The replacement Worker to be mutually approved by the Client."

This gives a limited right of substitution where the Worker is "unable" to perform.

The standard Terms and Conditions annexed to the Proactive/MKM agreement – the agreement bearing in its title the words "for the services of Martin Ellwood" – contain no express provision for the substitution of one worker for another. Those Terms and Conditions impose obligations on MKM to do certain things and impose restrictions on what its staff may do. Mr Whittaker says that the detailed terms and conditions of the MKM/Proactive contract refer to the work being done by MKM's staff (defined he says as employees and representatives of MKM), and that this indicates that it was agreed that persons other than Mr Ellwood could perform the services. I do not agree. The references to MKM's staff in that contract do not expressly refer to an obligation on MKM's staff to provide the services, rather they are restrictions and obligations imposed on the conduct of its staff and so to my mind are to be construed as restrictions and obligation applicable to the member of staff agreed to be supplied, namely Mr Ellwood. In my view the Terms and Conditions contain nothing which varies the terms specified in the front sheet which are for the provision by MKM of Martin Elliott. There is in this agreement no express or implied right for MKM to supply anyone else in his place however able he might be. There was no evidence of practice or conduct in the relevant period relevant to this contract which would indicate variation of the formed provisions of this contract. However, I believe it is likely that if LGL consented to a substitute Proactive would also have consented.

I concluded above that LGL regarded the arrangement as being for the services of Mr Ellwood only and that at the relevant time the most that Mr Ellwood had was an expectation that LGL would consider favourably a substitution introduced by him.

I conclude that if the arrangements had been incorporated into a contract between Mr Ellwood and LGL there would have been no provision under which Mr Ellwood could provide a substitute for his own personal service unless Mr Ellwood was unable to work for LGL and LGL approved the substitute in advance.

I now ask the alternative question: what would the contract have contained? Mr Whittaker says that the evidence showed that had the parties got together and discussed substitution a precise right to substitute would have been agreed and that such a right would therefore have been contained in the notional contract. I agree that if the question had been raised some agreement would have been arrived at. But I do not believe that LGL would have agreed to accept anyone sent along by Mr Ellwood : they valued Mr Ellwood and his abilities, they would have wanted to be sure that they were satisfied that any substitute was as good as Mr Ellwood and could take over what he was doing quickly and without disruption. In my view the right would have been very limited – it would have been to substitute only a person approved in advance by LGL.

A contract of or for services

54. I now turn to consider whether had Mr Ellwood been directly engaged by LGL on the terms of the contract I have discussed above, he would, in the circumstances I have found, have been engaged under a contract of service. I start by considering the various indicia from the case law.
55. Mutuality of obligation

(a) obligation

There was no obligation to renew any of the contracts at the end of their respective terms. But that is not relevant to whether there was mutuality during the period of each fixed term contract. I consider here whether there would have been mutuality during the course of each fixed term.

During each fixed term Mr Ellwood would have been obliged to work and LGL would have been obliged to remunerate him.

I have found, that on either approach to determining the terms of the notional contract that there would have been no obligation to provide work for Mr Ellwood but that there would have been an obligation to pay if work was not available.

(b) for personal service

I have concluded that the notional contract would contain only a very limited right of substitution. The finding that substitution would have been permitted only where LGL approved indicates to my mind that until LGL approved the notional contract was a contract for Mr Ellwood's personal service. In my view that limited right is not sufficient to prevent the contract being one for "his own work".

(c) conclusion

I conclude that the first of MacKenna J's conditions is fulfilled. Under the notional contract it can properly be said that Mr Ellwood would have agreed to provide his own work for consideration.

The lack of a substantial right of substitution in those circumstances is a position towards employment.

Control

56. Mr Whittaker says that although LGL monitored the progress of a project, there is a significant difference between monitoring a worker and controlling him. He points to the evidence of the time Mr Ellwood was in Australia when he reported back to Mr Jarrett but Mr Jarrett's role was to provide help and facilitation for Mr Ellwood not to tell him what to do. He accepts that Mr Ellwood worked fairly standard hours but that was necessary to do the work not because he was commanded to keep those hours. Overall he says that there was not that degree of control present which would have made Mr Ellwood the servant of LGL.
57. Mr Ellwood, in my opinion would have been subject to the kind of control which in the context of a professional employee would be sufficient to say that LGL was his master.
58. Under the notional contract LGL would have had a right to require him to undertake a project in co-operation with other persons at LGL and to adapt the course of his work to ensure the most effective progress as determined by internal discussions. That right would in my view be sufficient in the case of a professional skilled person to say that LGL had a right to control what Mr Ellwood did and, generally when he did it, or to say that he was so subject to LGL's control (albeit exercised through guidance and discussion rather than command) as to make LGL his master.
59. I therefore conclude that the second of MacKenna J's conditions is fulfilled. I also regard the nature of the constraints and guidance to which he was subject as an indication of employment.

Other factors consistent with a contract of service

60. I deal in paragraphs 59 to 69 below with the other indicia but none of them seem to me to permit the conclusion that the contract was inconsistent with a contract of service.
61. Had the contract been simply for the delivery of a particular project – the development, the code, and the implementation that it could have been inconsistent with a contract of service. But it was not, it was for expert time to be spent in the development and delivery of the project. Mr Ellwood was not in the position of a painter engaged to paint a room; he was in the position of a painter employed to paint such parts of the house as his employer would from time to time require.
62. I therefore conclude that none of MacKenna J's conditions was failed, and thus that it is possible for the national contract to constitute one `of service'.

Business Risk

63. Like an employee Mr Ellwood was financially dependent upon one payer. Whilst by working a few extra hours Mr Ellwood could earn more, the scope for extra work was limited. Mr Ellwood was at risk if his work was substandard and there was an occasion when he worked uncharged for hours to remedy a defect. A professional employee he accepted might also work unpaid overtime to remedy a defect, but overall I did think that Mr Ellwood was more at risk on this front than a normal professional employee. Mr Ellwood's wages would have been paid some time after each month and which would be unusual in the case of an employee.

Overall these factors pointed gently away from employment but not vigorously so.

64. Mr Whittaker pointed to the financial risk inherent in final term contracts some of which lasted for only four weeks. That was quite different he said from the position of a normal employee. I agree that it is different from the position of an employee on an indefinite contract, but an employee could also be engaged for a fixed term. If that term were long enough or if the term were extended the employee might acquire statutory employment protection which could fetter the employer's ability to determine the contract, but those statutory rights derive from being an employee and are not a feature of what it means to be an employee. I do not think therefore that the fixed term nature of the engagements is a pointer away from employment. If one views the succession of contracts as a whole then the effect of the arrangements is a continuing notional contract with irregular break points. That would be an unusual form of employment contract today (probably as a practical effect of the employment protection legislation) but it does not to my mind point strongly away from employment.

In business on his own account?

65. Do these financial considerations, the short term nature of the contracts and the other circumstances point towards Mr Ellwood being in business on his own account if engaged under the notional contracts? In my view they do not. Mr Ellwood would have had little opportunity to increase his profit and was not conducting any form of undertaking. His position was quite different from the mixer in Lorrimer: he worked for one company only for a succession of engagements over many years.

Equipment and expense

66. Mr Ellwood's work was mainly on LGL's computer. It had to be. This factor is neutral. A laptop was provided by MKM in 2002 – towards the end of the period under appeal – and it paid for Mr Ellwood's continuing education. These factors together point somewhat away from employment but not substantially.

On the other hand when Mr Ellwood worked in Australia on the Australian project his expenses of travel were met by LGL. It would, Mr Whittaker says not be unusual to pay a decorator for the wallpaper he uses in what would clearly be a contract of service. I also note that a professional firm may charge its clients separately for specific out of pocket expenses. Overall I find that in relation to that project this indicator did not point towards employment but did not point strongly towards self employment.

Benefits

67. The lack of contractual benefits such as holiday pay, sick pay, car parking or pension arrangements point towards self-employment.

Termination

68. Termination on notice is less usual in a contract for service although as Mr Whittaker pointed out there will be cases where a notice period will be included: he gave the example of a contract to build a house where there might be provision for early termination on notice if the parties fell out. But, in my view, the weeks' notice provision points more towards employment than self-employment.

Intention of the parties

69. The parties' intention as to whether there should be an employment relationship are clearly irrelevant. Their intention in relation to specific circumstances was in my view relevant to the consideration of the notional contract on the what-would-it-contain basis and has been considered elsewhere.

Part and Parcel

70. I had the impression that while he was working at LGL Mr Ellwood was part and parcel of the organisation. I accept that he was recognised as a contractor rather than as a permanent member of staff, but he sat alongside other members of staff discussed future projects, and was called upon for help in emergencies and worked along with them on the projects as would a permanent employee.

Conclusion

71. Standing back and looking at the whole picture I am left with the distinct impression that under the notional contract Mr Ellwood would have been an employee. He would have been providing his own work to do those tasks allocated to him and would have been paid broadly for a 37½ hour week. To me it appears that his job was working for LGL, not that he made his money by providing something to LGL. He was an expert skilled independently minded professional who worked at LGL and for no one else on terms (as to what he did, when he was there and how his work was organised) which were substantially similar (although not identical) to those applicable to an employee but on fixed term contracts.
72. Accordingly I find that the conditions in Schedule 12 FA 2000 and SI 2000/727 were fulfilled. On that basis I dismiss the appeal against the Determinations.
73. The Decision made in relation to National Insurance decided that Mr Ellwood was to be treated as "an employed earner in respect of his engagement with MKM Computing for the period 6/4/2000 to 5/4/2002. The contracts before me related only to the period up to 28 March 2002 and my decision therefore relates only to that period. This was recognised by the parties and in the agreed statement of facts it was stated that `if the appeal is not upheld, the period in the section 8 decision should be revised to "6 April 2000 to 29 March 2002". Regulation 10 of the Social Security Contributions (Decisions and Appeals) Regulations 1999 gives the tax appeal Commissioners power to vary a decision. Accordingly, given my conclusions as to the satisfaction of the conditions in SI 2000/727 I find that the Decision should be varied as described but otherwise shall stand.

CHARLES HELLIER

SPECIAL COMMISSIONER

RELEASED: 11 December 2007

Re-released with amendments made: 2 May 2008

SC 3029/2006

Authorities referred to in skeleton arguments and the agreed bundle of authorities not referred to in the decision:-

Nethermare (St Neots) Ltd v Gardiner and Another (1984) ICR 612

McManus v Griffiths (1997) 70 TC 218

Tilbury Consulting Ltd v Giltens (2003) SpC 390

Netherlane Ltd v York (2005) SpC 457