Dragonfly Consulting Ltd v R & C Commissioners
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE HENDERSON,The Honourable Mr Justice Henderson: |
| Judgment Date | 03 September 2008 |
| Neutral Citation | [2008] EWHC 2113 (Ch) |
| Date | 03 September 2008 |
| Court | Chancery Division |
| Docket Number | Case No: CH/2008/APP/0061 |
[2008] EWHC 2113 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand,
London, WC2A 2LL
The Honourable Mr Justice Henderson
Case No: CH/2008/APP/0061
Mr Andrew Stafford QC (instructed by Nelsons Solicitors LLP) for the Appellant
Ms Susan Chan (instructed by the Solicitor to HMRC) for the Respondents
Hearing date: 6 June 2008
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction and Background
This is an appeal by Dragonfly Consultancy Limited (“Dragonfly”) against a decision of a single Special Commissioner, Mr Charles Hellier, released on 11 December 2007 (“the Decision”) after a two day hearing in September of that year. The Decision is reported at [2008] STC (SCD) 430. The appeal lies only on questions of law: see section 56A(1) and (4) of the Taxes Management Act 1970.
The Special Commissioner dismissed Dragonfly's appeals against a decision issued on 30 April 2004 in respect of liability to National Insurance Contributions (“NIC”) for the period of three years from 6 April 2000 to 5 April 2003, and determinations of liability to PAYE income tax issued on 18 June 2004 in respect of the same period. The decision and determinations under appeal were made pursuant to what is generally known as the IR35 legislation, and related to arrangements whereby Dragonfly indirectly provided the services of its sole director and 50% shareholder, Mr Jonathan Bessell, to the AA group of companies during the relevant period.
Mr Bessell is a highly skilled IT system tester, and during the relevant period he worked almost exclusively for the AA. The Special Commissioner found that his services to the AA were predominantly directed to the testing aspects of three IT projects then being undertaken by the AA. The first project lasted seven months from January 2000 to July 2000, and related to the replacement of an “Ingres” database with an “Oracle” database. The second project lasted 22 months from August 2000 until April 2002, and related to the AA. com website. The third project was concerned with the AA's travel insurance product, OATI, and Mr Bessell was involved in testing between May 2002 and the end of January 2003: see paragraph 7(iii) of the Decision.
It is a complicating feature of the present case that Dragonfly did not provide Mr Bessell's services directly to the AA, but did so through arrangements with an agency company, DPP International Limited (“DPP”). DPP was unconnected with Dragonfly and Mr Bessell, and carried on a business which included the provision of consultancy services and temporary staff in the fields of data processing, computing and project management. On 12 October 1998 DPP had entered into an agreement with the AA (acting through a group company, The Automobile Association Developments Limited) whereby DPP agreed to supply the AA with such temporary staff as they might from time to time require in the fields mentioned above, subject to the detailed terms and conditions set out in the agreement. The agreement provided in clause 2 that it should continue for a period of 12 months only, and it contained no provision for renewal. However, no subsequent version of the agreement was produced in evidence, and having heard oral evidence from two senior AA employees (Mr Palmer and Mr Kersley) the Special Commissioner found on the balance of probabilities that throughout the period under appeal Mr Bessell's services were provided to the AA through DPP, and were provided under agreements which, so far as material, contained the same general terms as the October 1998 agreement: see paragraph 7(v) of the Decision. No challenge has been made to that finding.
The October 1998 agreement provided for the AA to notify DPP in advance of its requirements for temporary staff, following which DPP would supply full CVs for suitable candidates and the AA would then inform DPP which (if any) of them it required DPP to provide, and the date on which they were to start work. Prior to the commencement of the work, DPP was obliged to supply the AA with a schedule in the form annexed to the agreement. Two of the schedules relating to Mr Bessell, covering the period from 3 January 2000 to 2 July 2000, were in evidence before the Special Commissioner. Each of them named Mr Bessell alone as the individual whose services were to be supplied, and gave his job title as “Consultant”.
The relationship between Dragonfly and DPP was governed by a series of fixed term contracts, which are described as follows in paragraph 7(iv) of the Decision:
“It was in October 1998 that [Dragonfly] first contracted with DPP for the supply of Mr Bessell's services. In the period 1 April 2000 to 28 February [2003] a series of fixed term contracts were made between [Dragonfly] and DPP. There were seven such contracts. With the exception of 1 April 2001, 29, 30 and 31 December 2001, 1 January 2002, and 28 and 29 September 2002, the combined period of these contracts includes everyday in the period between 1 April 2000 and 28 February 2003. Each contract took the form of a schedule which specified inter alia the period of the contract, the rate of payment and invoicing arrangements, and annexed General Terms and Conditions which were materially the same for each contract (save in those respects I discuss later). The schedule indicated that it set out the principal terms and conditions on which [Dragonfly] would provide a consultant to perform services for DPP's client. The first and the seventh schedules indicated the name of the consultant to be provided by [Dragonfly]: “Jonathan Bessell”.”
There was no written contract at any stage between Dragonfly and Mr Bessell: see paragraph 7(vi) of the Decision.
The background to the IR35 legislation (so called because that was the number of the Inland Revenue press release in March 1999 which heralded its introduction) is fully set out in the judgment of Robert Walker LJ (as he then was) in R (Professional Contractors Group) v IRC [2001] EWCA Civ 1945, [2002] STC 165. In paragraph 51 of his judgment, with which Auld and Dyson LJJ agreed, he described the aim of both the tax and the NIC provisions as being:
“to ensure that individuals who ought to pay tax and NIC as employees cannot, by the assumption of a corporate structure, reduce and defer the liabilities imposed on employees by the United Kingdom's system of personal taxation.”
The method adopted by the legislation to achieve this aim, broadly stated, is to tax an individual worker (such as Mr Bessell) whose services are provided to a client (such as the AA) through an intermediary (such as Dragonfly) on the same basis as would apply if the worker were performing those services as an employee, provided that (in terms of the income tax test set out in paragraph 1(1) of schedule 12 to the Finance Act 2000):
“(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.”
In other words, the legislation enacts a statutory hypothesis and asks one to suppose that the services in question were provided under a contract made directly between the client (here the AA) and the worker (here Mr Bessell). If that hypothetical contract would be regarded for income tax purposes as a contract of employment (or service), the legislation will apply. Conversely, if the hypothetical contract would not be so regarded, the legislation will not apply.
It is important to notice that the effect of the statutory hypothesis is not automatically to transform all workers whose services are supplied through a service company into deemed schedule E taxpayers. On the contrary, as Robert Walker LJ stressed in paragraph 12 of his judgment in R (Professional Contractors Group) v IRC:
“The legislation does not strike at every self-employed individual who chooses to offer his services through a corporate vehicle. Indeed it does not apply to such an individual at all, unless his self-employed status is near the borderline and so open to question or debate. The whole of the IR35 regime is restricted to a situation in which the worker, if directly contracted by and to the client “would be regarded for income tax purposes as an employee of the client”. That question has to be determined on the ordinary principles established by case law …”
For NIC purposes, the statutory hypothesis is framed in slightly different language. Regulation 6(1) of The Social Security Contributions (Intermediaries) Regulations 2000, SI 2000 No. 727, (“the 2000 Regulations”) says that they apply where the services of the worker are supplied “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 as employed in employed earner's employment by the client.”
The nature of the exercise which the court has to perform under regulation 6(1) was helpfully described by Hart J in Synaptek Ltd v Young [2003] EWHC 645 (Ch), [2003] ICR 1149, in a passage which merits quotation in full. It is helpful not only for Hart J's analysis of the statutory language, but also for his rejection of the submission made by counsel for the taxpayer that the question was necessarily one of law because it involved the characterisation of a hypothetical contract. Hart J said...
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