FS Consulting Ltd v McCaul (HM Inspector of Taxes)

1 FS Consulting Ltd ("the appellant") appeals against four decisions made on 21 June 2001 relating to national insurance contributions. The first decision was in the following terms:

That the circumstances of the arrangements between Frank Simpson and Better Investments plc for the performance of services from 6 April 2000 to 30 June 2000 are such that, had they taken the form of a contract between Frank Simpson and Better Investments plc, Frank Simpson would be regarded for the purposes of Pt. I-V of the Social Security (Contributions and Benefits) Act 1992 as employed in employed earner's employment by Better Investments plc. That FS Consulting Ltd is treated as liable to pay primary and secondary Class I contributions in respect of the worker's attributable earnings from that engagement.

2 The other three decisions were in the same terms save that the dates mentioned were:

In the second decision - 3 July 2000 to 1 September 2000

In the third decision - 4 September 2000 to 30 November 2000

In the fourth decision - 1 December 2000 to 29 June 2001

3 The legislation about the payment of National Insurance contributions is contained in the Social Security Contributions and Benefits Act 1992 ("the 1992 Act") which contains separate provisions applicable to employed earners on the one hand and self-employed earners on the other. Section 75 of the Welfare Reform and Pensions Act1999 inserted a new s. 4A into the 1992 Act to take effect from 22 December 1999. The relevant parts of s. 4A provide:

1. 4A(1) Regulations may make provision for securing that where-

   1. (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),

   2. (b) the performance of those services by the worker is (within the meaning of the regulations) referable to arrangements involving a third person (and not referable to any contract between the client and the worker), and

   3. (c) the circumstances are such that, were the services to be performed by the worker under a contract between him and the client, he would be regarded for the purposes of the applicable provision of the Act as employed in employed earner's employment by the client,

relevant payments or benefits are, to the specified extent, to be treated for those purposes as earnings paid to the worker in respect of an employed earner's employment of his.

4 The regulations made under the provisions of new s. 4A are theSocial Security Contributions (Intermediaries) Regulations 2000 (SI 2000/727) ("he 2000 regulations") which came into force on 6 April 2000. The relevant parts of reg. 6 provide:

1. 6(1) These regulations apply where-

   1. (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"),

   2. (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

   3. (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.

5 Mr Frank Simpson is a computer consultant and the sole director and shareholder of the appellant. During the relevant time Mr Simpson supplied his services to the appellant which supplied them to an agency called Topper Recruitment Ltd ("Topper") who supplied them to Better Investments plc ("Better"). It was not disputed that Mr Simpson personally performed services for the purposes of a business carried on by Better within the meaning of s. 4A(1)(a) and reg. 6(1)(a).

6 The Inland Revenue argued that reg. 6(1)(c) applied. The appellant argued: first, that "the arrangements" mentioned in reg. 6(1)(c), and the arrangements mentioned in reg. 6(1)(b), were those involving the intermediary (the appellant) but not the arrangements involving Topper who was not an intermediary as defined; secondly that had those arrangements taken the form of a contract between Mr Simpson and Better, Mr Simpson would not be regarded as employed by Better, in particular because under those arrangements Better did not pay remuneration to Mr Simpson but to Topper; and, thirdly, that the arrangements involving Topper were governed by the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689) ("the 1978 regulations") but that under those regulations Mr Simpson was not treated as falling within the category of an employed earner because Mr Simpson was not subject to supervision, direction or control as to the manner of the rendering of his services.

7 It seems to me it would not be proper for me to determine this appeal on the basis of the appellant's third argument. The decision under appeal is not based on the 1978 regulations but, more importantly, the third argument does not concern the appellant in this appeal (FS Consulting Ltd) but does concern Topper and Mr Simpson, neither) of whom are parties to this appeal. I have therefore identified the first two of the appellant's arguments as being the issues in the appeal. However, as I heard arguments from the appellant about the 1978 regulations I will very briefly express my views.

8 Thus the issues for determination in the appeal are:

1. (2) whether "the arrangements" mentioned in reg. 6(1)(c), and the arrangements mentioned in reg. 6(1)(b), are those involving the intermediary (the appellant) but not the arrangements involving Topper who was not an intermediary as defined; and

2. (3) whether, had the arrangements taken the form of a contract between Mr Simpson and Better, Mr Simpson would be regarded as employed in employed earner's employment by Better.

9 Oral evidence was given by Mr Simpson on behalf of the appellant. On 19 November 2001 Mr Simpson signed a written statement of his evidence. An agreed bundle of documents, which contained a copy of Mr Simpson's statement, was produced.

10 From the evidence before me I find the following facts.

11 The appellant was incorporated on 21 July 1997 and commenced to trade on 31 August 1997. Its sole director and shareholder is Mr Simpson who is a computer consultant conversion specialist. Mr Simpson's skills are comparatively rare; in evidence which I accept Mr Simpson said that he knew of no more than 40 other consultants with his expertise in conversion work.

12 Mr Simpson started working with a major bank in 1987 and trained as a computer programmer. He then became a senior programmer and later was promoted to team leader. In 1997 Mr Simpson left the bank. He personally sent his curriculum vitae to various companies seeking the position of analyst/programmer. Later in 1997 the appellant was incorporated.

13 The appellant then arranged through an agency for Mr Simpson to provide services to a building society for three months and then to an insurance company for six months. (Agencies make no initial charge for matching workers to clients but make a profit by entering into contracts with both the worker and the client under which the client pays an hourly rate to the agency and the agency pays a lower hourly rate to the worker.) Mr Simpson continued to write personally to other companies seeking positions with them. He wrote from his home address giving the telephone numbers both of his home and of his current place of work.

14 After the initial six months the contract with the insurance company was extended but shortly thereafter the insurance company sold its business. Mr Simpson was given the four weeks' notice provided for by his contract with the agency and, as a result of the recommendation of some colleagues with whom he had worked at the insurance company, was offered a contract with Better which commenced in December 1998. When that contract was complete Mr Simpson was offered another contract with Better. He continued to provide services to Better until and during the period the subject of the decisions under appeal.

15 The decisions under appeal relate to the period from 6 April 2000 to 29 June 2001. Throughout that time Mr Simpson provided his services to the appellant, who in turn provided them to the agency Topper, who in turn provided them to Better. Better paid Topper; Topper paid a lesser sum to the appellant; and the appellant in turn paid Mr Simpson.

16 A contract was entered into between Topper and the appellant in April 2000. The contract provided that, for the period mentioned in the schedule, the appellant would provide an individual to perform consultancy services for a client of Topper; the services were to be performed by the individual named in the schedule but the appellant might propose a replacement which had to be approved by the client. The services were to be performed at the location specified. The individual had to take all necessary instructions from the client and comply with all the client's rules, regulations and procedures. Travelling time and expenses were the responsibility of the appellant. The individual had to record the hours worked on a Topper time sheet on a weekly basis and send it to Topper. The contract could be terminated immediately if the client terminated its agreement with Topper because of incompetence, unsuitability or unprofessional conduct by the individual. Otherwise the contract could be terminated by Topper with four weeks' notice.Clause 7 of the contract read:

1. 7. It is clearly understood that in no circumstances can this contract be interpreted as a contract of employment and that it is a...