HM Revenue and Customs v Larkstar Data Ltd
| Jurisdiction | England & Wales |
| Judge | SIR DONALD RATTEE |
| Judgment Date | 24 November 2008 |
| Neutral Citation | [2008] EWHC 3284 (Ch) |
| Docket Number | Case No: CH/2008/APP/0289 |
| Court | Chancery Division |
| Date | 24 November 2008 |
[2008] EWHC 3284 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Sir Donald Rattee
Case No: CH/2008/APP/0289
No representation provided
Approved Judgment
: This is an appeal by Her Majesty's Revenue & Customs against a decision of the General Commissioners allowing an appeal by Larkstar Data Ltd against a determination by Her Majesty's Revenue & Customs of liability to income tax under PAYE regulations and social security contributions for the period of 6 April 2001 to 5 April 2003.
The relevant background facts can be stated fairly shortly. Larkstar Data Ltd, to which I will refer simply as Larkstar, is a company which describes its business as “the provision of computer consultancy services”. One Mr Alan Brill is its sole director.
Technology Project Services International Ltd (“TPS”), is a company which acts as an agency for the engagement of contractors by a third company, Matra Bae Dynamics UK Ltd (“MBDA”) which at the material time worked on defence missile systems and was engaged on a long project which required specialist computer services.
For the purpose of acquiring these services MBDA entered into agreements with TPS for their procurement.
Starting on 11 August 2000 Larkstar entered into a series of agreements with TPS for the provision of computer consultancy services to MBDA. Pursuant to those agreements Larkstar provided to MBDA the specialist services of Mr Brill, which he provided for MBDA at its premises. There was no direct contract between Mr Brill and MBDA. He was the person whom Larkstar provided for the purpose of fulfilling its contractual obligations to TPS.
However HMRC took the view that these arrangements were such as to fall within the anti-avoidance provisions contained in schedule 12 to the Finance Act 2000, dealing with income and corporation tax, and regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000, Statutory Instrument 727 of 2000 (“the Social Security Regulations”), dealing with national insurance contributions. These provisions together are commonly referred to as the IR35 legislation.
The Revenue served notices of determination and decision on Larkstar on the basis that the IR35 legislation applied.
The purpose of the IR35 legislation was explained by Robert Walker LJ, as he then was, in R (on the application of Professional Contractors Group Ltd and others) v Inland Revenue Commissioners [2001] EWCA Civ 1945 reported in 2002 Simon's Tax Cases at 165 as follows:
“…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 IR35 legislation provides, so far as material for present purposes, as follows. Regulation 6 to the Social Security Regulations provides:
“6. (1) These Regulations apply where –
(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”),
(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
(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.
(3) Where these Regulations apply –
(a) the worker is treated, for the purposes of Parts I to V of the Contributions and Benefits Act, and in relation to the amount deriving from relevant payments and relevant benefits that is calculated in accordance with regulation 7 (“the worker's attributable earnings”), as employed in employed earner's employment by the intermediary, and
(b) the intermediary, whether or not he fulfils the conditions prescribed under section 1(6)(a) of the Contributions and Benefits Act for secondary contributors, is treated for those purposes as the secondary contributor in respect of the worker's attributable earnings.
And Parts I to V of that Act have effect accordingly.”
The corresponding provisions, so far as material, of schedule 12 to the Finance Act 2000 are as follows:
“(1) This Schedule applies where:
(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”),
(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
(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.
(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.”
I need not refer to the provisions of the 2000 Act setting out the consequences of schedule 12 applying. They are not in issue. Suffice it to say that, as with the Social Security Regulations, they treat the worker as employed by the intermediary. I am only concerned on this appeal, as were the General Commissioners, with the question of whether schedule 12 does apply to the present case. It is common ground that there is no relevant difference for present purposes between the terms of Regulation 6 of the Social Security Regulations and Schedule 12 to the 2000 Act.
The General Commissioners rejected the view of the Revenue that the IR35 legislation did apply in the present case. They concluded that, had Mr Brill, “a worker” for the purpose of the IR35 legislation, provided the services he did to MBDA, “the client” for the purpose of the legislation, under a direct contract with MBDA, he would properly have been regarded as an independent contractor with, and not an employee of, MDBA, with the result that the IR35 legislation did not apply.
The Revenue appeals to this Court against that decision on four grounds set out in its grounds of appeal. The grounds of appeal are:
“The General Commissioners erred in law in that they
(1) misdirected themselves in law and in particular having identified the correct question they did not answer it and applied the wrong test in determining whether or not the arrangements would have amounted to a contract of or for service if they had been entered into directly with the client.
(2) misdirected themselves in law in their approach to the issues of
(a) control (b) mutuality of obligation and (c) the relevance of a number of considerations to the question they had to determine.
(3) took into account irrelevant considerations and based their decision on a number of findings of fact which were either not supported by the evidence or inconsistent with other findings of fact.
(4) reached a conclusion which was not open to them on the evidence before them.”
In the Case Stated by the General Commissioners they set out facts found by them in paragraph 5. I shall refer to some of those findings which are as follows.
(1) On 11 August 2000 Larkstar entered into the first agreement with TPS for the provision of consulting services to MBDA.
(2) This was followed by four further successive such agreements. In fact the agreements were each for a period of six months immediately following the previous agreement, making a total of two and a half years during which Mr Brill's services were provided to MBDA pursuant to those agreements.
(3) Remuneration to be paid by MBDA was based on an hourly rate.
(4) There was no provision in the contracts for sickness, holidays, pensions, bonuses or employee's rights and privileges, such as car parking, sports facilities or medical services.
(5) An ongoing project known as ASRAAM, being worked on by MBDA, was the sole purpose of the contracts entered into between Larkstar and TPS.
(6) The work to be done by Mr Brill had to be performed exclusively at MBDA's premises for security reasons.
(7) Mr Brill was encouraged to work during MBDA's core hours for the purpose of co-ordinating his work with that of others, but he was free to decide when to work outside these core hours.
(8) Once Mr Brill and MBDA had negotiated the next stage of the ASRAAM project no control over how Mr Brill did his work was exercised by MBDA.
(9) Each of the five contracts allowed a substitute to be provided for Mr Brill, but the overriding security arrangements required substitutes to undergo procedures as rigorous as contractors and in practice that did not happen.
(10) Each of the five contracts required Mr Brill to provide his own equipment, but the overriding security arrangements required him to use MBDA's on-site equipment.
(11) Mr Brill was deliberately set apart by MBDA from their company's structure so that he could independently analyse and criticise and test their systems so as to further the success of the project. His professional independence was what MBDA hired. Without it there was no point in hiring him.
(12) He occupied no post and had no title. His badge described him as a contractor.
(13) When the project ended, or, if it had been terminated prematurely, the...
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