Alternative Book Company Limited v Her Majesty's Revenue & Customs, SPC 00685

Spc00685

INCOME TAX & NATIONAL INSURANCE – IR35 - Worker supplied through intermediaries – whether circumstances were such that had the services been provided under a contract directly with the worker the worker would have been an employee –Ye s– Appeal dismissed

SPECIAL COMMISSIONERS

ALTERNATIVE BOOK COMPANY LIMITED Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMS Respondents

Special Commissioner: MICHAEL TILDESLEY OBE

Sitting in public in Cardiff on 22 and 23 January 2008 with final representations by 27 February 2008

John Antell counsel instructed by Lawspeed Limited for the Appellant

Susan Jones and Colin Williams, HM Inspectors of Taxes for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appeal

1. The Appellant was appealing against determinations requiring it to pay tax for the years 2000-01 and 2001-02 and national insurance contributions for the period 6 April 2000 to 5 April 2002 on deemed payments to Keith Shepherd, the Appellant’s sole director and shareholder, in respect of his work for Gerling NCM (now known as Atradius). The notices of the determination under regulation 80 of the Income Tax (PAYE) Regulations 2003 and section 8 of the Social Security Contributions (Transfer of Functions) Act 1999 were made on 9 December 2005.

2. The determinations were made under what is commonly known as the IR35 legislation which was enacted for the purpose of curbing the tax advantages enjoyed by some individuals who supplied their services through a personal service company to a client. Under the IR35 legislation if it was found that the services provided by the person were given as an employee rather than genuinely as an independent contractor the fees paid to his personal service company would not be treated as company revenue upon which corporation tax was payable but rather as deemed salary to him. The company would then be responsible for the accounting of tax and national insurance contributions on the deemed salary.

3. Mr Shepherd who was a skilled IT consultant provided his services to Gerling NCM through a series of two connected contracts. The first was a contract between the Appellant and Computer People Limited, a recruitment agency, to perform services for Gerling (NCM) (“the lower level contract”). The second was a contract between Computer People Limited and Gerling NCM to supply the services of the Appellant using Mr Shepherd (“the upper level contract”). The Appellant had no written contract with Mr Shepherd. There was no issue taken about the interposition of Computer People Limited in the contractual sequence.

4. The Appellant was incorporated on 10 April 1997 and commenced trading on that day. Mr Shepherd was the sole director and shareholder of the Appellant. Gerling NCM was incorporated on 15 October 1998 with offices in Cardiff and across the world. The UK arm of its business came into operation following the privatisation of a government agency. The business activity of Gerling NCM was the provision of export and domestic credit insurance. The initial contract to provide services to Gerling NCM ( presumably its predecessor) started 2 February 1998.

5. The parties were in agreement that for the purposes of the IR35 legislation Mr Shepherd was the worker, the Appellant the intermediary, and Gerling NCM the client.

6. The substantive issue in dispute was whether Mr Shepherd would have been an employee of Gerling NCM if he had contracted direct with Gerling (NCM) under the hypothetical contract presupposed by the IR35 legislation. The parties were content for a decision to be made in principle on the substantive issue.

The Evidence

7. I heard evidence from Mr Shepherd for the Appellant. The Respondents called four witnesses who were:

   1. Mr Christopher Saunders, HMRC Employer Compliance Officer, who was present at the interviews with Mr Shepherd on 10 October 2002 and 10 December 2004.

   2. Mr David Lewis, HM Inspector of Taxes, who carried out the investigation into the Appellant’s tax affairs.

   3. Mr Derek Gigg, Head of Service Delivery Management at Gerling NCM, who was previously a manager responsible for software development at Gerling NCM, and one time manager to whom Mr Shepherd reported.

   4. Mr Stephen Prentice, Manager IT Services at Gerling NCM, Mr Shepherd nominated Mr Prentice as the person to speak to the Respondents about his working relationship at Gerling NCM.

8. The parties prepared five bundles of agreed documents which together with additional documents submitted at the hearing were admitted in evidence. Further the parties supplied skeleton arguments and a Respondents’ response together with eight bundles of authorities at the hearing.

9. The contract documentation included in the bundles consisted of:

   1. The Upper Level (Computer People Limited & Gerling NCM): copies of contracts extending the terms of assignment covering the period 16 August 1999 to 26 April 2002, and copies of contract SP862 and extension from 27 April 2002 until 25 October 2003. A copy of the first known main contract, SP861, was not available.

   2. The Lower Level (Computer People Limited & Appellant): copies of contracts extending the terms of assignment of CPL98 covering the period 3 April 2000 to 29 September 2000, copies of an unsigned CPL00 and extensions covering the period 2 October 2000 to 25 April 2002 and a copy of, CPL02 covering the period 25 April 2002 to 25 October 2002, outside the periods under appeal. A copy of the first known main contract, CPL98, was not available

10. The parties in their submissions referred to the contract documentation under the generic groupings of lower level and upper level. I adopted the same convention in this decision except when reference was made to a term in a specific contract or contract extension. The Respondents did not take issue with the missing contracts, since there was evidence of contract documentation for the periods under Appeal. There were no significant inconsistencies between the terms of the lower and upper level contracts.

11. Following the end of the hearing on 23 January 2008 directions were issued requesting further representations on the issue of mutual intention which were received by the due date of 27 February 2008.

Preliminary Issue

12. On 11 January 2008 the Respondents made an application for directions that the issue to be decided should be restricted to whether IR35 applied in principle during the 2000/01 and 2001/02 tax years. The Respondents objected to the Application pointing out that the directions issued on 15 March 2007 identified the issue to be:

“whether the services which Mr Shepherd provided to Astradius (formerly Gerling NCM) under a number of separate assignments… to 2005 were caught by the IR35 legislation.”

13. On 17 January 2008 I directed that

    1. The question for determination is whether the IR35 legislation should apply in principle to the whole of the work undertaken by the Appellant for Gerling NCM for the tax years 2000/01 and 2001/02.

    2. The parties are entitled to call evidence relating to events and arrangements outside the tax years 2000/01 and 2001/02 provided the evidence is relevant to the disputed issue and no severe prejudice is caused to the other party by the late disclosure of the evidence.

14. The real dispute between the parties regarding the preliminary issue was whether the Appellant could rely on facts, particularly the tax treatment and business activities of Mr Shepherd outside the tax years in dispute. I considered the dispute was not one of admissibility of evidence but about its weight and...