Alternative Book Company Ltd v HM Revenue and Customs

JurisdictionEngland & Wales
Judgment Date19 May 2008
Date19 May 2008
CourtSpecial Commissioners

special commissioners decision

Michael Tildesley OBE

Alternative Book Co Ltd
and
R & C Commrs

John Antell counsel instructed by Lawspeed Limited for the Appellant

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

Income tax and 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 - yes - appeal dismissed

A special commissioner decided in principle that if the services of an IT consultant had been provided under a contract directly between the consultant and the client rather than through his personal service company, the consultant would have been regarded for income tax purposes as an employee of the client for the tax years 2000-01 and 2001-02, and as employed in employed earner's employment by the client for the relevant period for the purposes of Social Security Benefits and Contributions Benefits Act 1992 part 1Pt. I-V of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992).

Facts

The taxpayer appealed against determinations made pursuant to the IR35 legislation, 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 the taxpayer's sole director and shareholder (S), in respect of his work for a client company (G).

Issues

Whether the IR35 legislation applied in principle to the whole of the work undertaken by the taxpayer for G in the relevant years; and whether S would have been an employee of G if he had contracted directly with G under the hypothetical contract presupposed by the IR35 legislation.

Decision

The special commissioner (Michael Tildesley) (dismissing the appeal) said that in order to decide whether a person carried on business on his own account it was necessary to consider many different aspects of that person's work activity. Each case had to be decided on its own individual circumstances, and the facts which might be compelling in one case in the light of all the facts might not be compelling in the context of another case. In the present case, the court would consider the evidence and findings of fact in the light of the indicators of employment and self-employment as identified by the Court of Appeal in Hall (HMIT) v LorimerTAX[1993] BTC 473.

Considering mutuality of obligation, S was required to perform services to complete IT projects for which G was obliged to pay a fee. G was also obliged to provide work for S. S did in fact work on average 35.25 hours per week throughout the two tax years under appeal.

The controls of reporting and quality assurance exercised over S's work were the same as those applied to G's employees working on IT projects. S worked as a member of a team, not generally on his own.

The taxpayer's submission that G did not require S to perform the contracted services personally relied upon a substitution clause in the contracts. That submission was without substance, and G had effectively contracted with S to perform the required services. The substitution clause was of no practical effect. S performed the services throughout the seven years he worked for G. If G had been contracting directly with S it would not have agreed to a substitution clause (Usetech Ltd v Young (HMIT)UNK [2004] EWHC 2248 (Ch); [2005] BTC 48 considered).

Whilst under contract with G, S was required to provide his services exclusively during the hours worked. There was no compelling evidence that S was in business on his own account during his engagement with G.

S was integrated within the IT department of G. He worked there for seven years, doing on average 36 hours a week until April 2004. He worked generally as a member of a team, which included employees. As with members of staff working on IT projects, he was required to make progress reports and submit his work to the quality assurance team.

The relevant contracts specified that the agreements did not constitute or imply an employment relationship between the parties. The insertion of such a clause in the hypothetical contract, however, would not be decisive about the nature of the working relationship between S and G. The effect of such a clause had to be considered in the context of the contract as a whole.

The legislation required the court to construct a hypothetical contract between G and S for the tax years in question from its findings on the arrangements and wider circumstances and decide whether the terms of the contract as a whole in the contextual circumstances constituted a contract for services or a contract of service. Under the contextual circumstances S was not exposed to significant financial risk from his engagement with G. His established tax treatment as a self-employed person did not prevent him from being an employee of G.

In the circumstances the hypothetical contract would have the necessary irreducible minimum to constitute an employment contract.

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 (Pay As You Earn) Regulations 2003 and Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8section 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. (2) 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. (3) Mr David Lewis, HM Inspector of Taxes, who carried out the investigation into the Appellant's tax affairs.

  3. (4) 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. (5) 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. (2) 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. (3) 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...

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