Northern Lights Solutions Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 February 2020 |
| Neutral Citation | [2020] UKFTT 100 (TC) |
| Date | 18 February 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 100 (TC)
Judge Ian Hyde
Michael Collins, counsel, appeared for the appellant
Mr Mason, presenting officer, appeared for the respondents
Income tax – Intermediaries legislation – IR35 – Personal services company – Hypothetical contract – Whether contract of employment – Yes – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed the appeal against IR35 determinations raised by HMRC in respect of a succession of project management contracts entered into with the same end client over the 2012–13, 2013–14 and 2014–15 tax years.
The appellant (Northern Lights Solutions Ltd) was a personal services company wholly owned by, and set up to supply the services of Mr Robert Lee, one of its directors (the other director being Mr Lee's wife). Prior to its incorporation, Mr Lee had been supplying services as a project manager across several industries in an employed capacity for approximately 10 years. Since incorporation, with the exception of one 6-month contract with Lloyds Bank, Northern Lights Solutions Ltd had been supplying Mr Lee's services to Nationwide since 2008 though these earlier years were not in contention.
At various times throughout the period under appeal, Northern Lights Solutions Ltd had contracted with Nationwide through two different employment agencies but it was accepted that the circumstances of those contracts were materially the same in both cases. For the purposes of IR35, the hypothetical contract is concerned only with the relationship between the person performing the work (Mr Robert Lee) and the client for whom that work is performed (Nationwide).
The FTT gave particular individual consideration to the tests of mutuality of obligation, substitution and control, before looking at whether the remaining provisions were consistent with the existence of an employment contract.
Under mutuality of obligations, the FTT found that there was a mutuality during the course of each contract, such that each was effectively a fixed term contract. However, it was accepted that outside of these fixed terms there was no obligation on the part of Nationwide to offer further work, not for Mr Lee to accept further work if it was offered.
In respect of substitution, the FTT found that although there was a theoretical right to provide a substitute, that right was limited. Under contracts via one of the agencies, Nationwide was under no obligation to accept a replacement that it did not consider suitable. Under contracts via the other agency, Nationwide had a similar right to refuse although that right would not be “unreasonably withheld”. Notwithstanding that a right may exist even if it is not exercised, the FTT found that there was no substantive prospect of either Mr Lee asking for, nor of Nationwide agreeing to the provision of a substitute.
The contracts set a professional working day of 7.5 hours and gave Nationwide the right to determine where Mr Lee worked, though in practice Nationwide did not insist on either of these rights. Nevertheless, the FTT accepted that those rights did exist even though they had not been exercised. Mr Lee did not work fixed hours and was, to some extent, able to set his own working patterns including working from home if it suited him but not significantly differently than might be expected of a similarly senior employee. The level of control over Mr Lee was held to be not inconsistent with him being a highly skilled employee and was compared to that of the master of a ship or a professional architect.
The remaining provisions of the contract were not found to be inconsistent with employment. Mr Lee took very little financial risk and his exposure was compared to that of a full-time employee on a fixed term contract. He had also worked for Nationwide (with the exception of a 6-month contract with Lloyds Bank and some other short gaps) almost continuously for 7 years so that he did not have to be interviewed or trained so could instantly start on any project.
In quoting from Carmichael v National power plc [1999] 1 WLR 2042, that mutuality of obligation is the “irreducible minimum … necessary to create a contract of service”, it was made clear that this is simply to determine whether or not a contract exists at all and is not determinative of whether that contract may be one of service or for services. In the light of the control and substitution tests, the accepted fact that there was no ongoing mutuality of obligation after the end of each contract was not found to be significant.
[1] This appeal is concerned with whether the appellant's contractual arrangements with Nationwide Building Society (“Nationwide”) are such that Mr Robert Lee, the appellant's employee, should be treated as an employee of Nationwide for the purposes of Chapter 8 of Part 2 of Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and Part 1 of the Social Security Contributions (Intermediaries) Regulations 2000 (“the Social Security Regulations” both “the Intermediaries Legislation”), commonly known as “IR35”.
[2] Following an investigation into the appellant's tax returns, on 2 February HMRC issued a determination under regulation 80 Income Tax (Pay As You Earn) Regulations 2003 (a “Regulation 80 determination”) and a notice under section 8 Social Security Contributions (Transfer of Functions, Etc) Act 1999 (a “Section 8 notice”) in respect of the period from 6 April 2012 to 5 April 2013 being £6,078 of income tax and £8,803 of National Insurance contributions (“NICs”).
[3] On 20 February 2017 the appellant appealed to HMRC in respect of the 2012–13 regulation 80 determination and section 8 notice.
[4] Following an internal review which concluded by a letter dated 7 June 2017, the appellant appealed the 2012–13 regulation 80 determination and section 8 notice on 5 July 2017.
[5] On 18 October 2017 HMRC issued further regulation 80 determinations and section 8 notices in respect of the periods from 6 April 2013 to 5 April 2015 being in £19,613 of income tax and £13,664 of National Insurance contributions in respect of tax year 2013–14 and £14,637 of income tax and £11,728 of National Insurance contributions in respect of tax year 2014–15.
[6] The appellant's contract with Lloyds Banking Group in this period, referred to below, was not the subject of the determinations and notices and so not within this appeal.
[7] On 1 November 2017 the appellant appealed to HMRC in respect of the 18 October 2017 regulation 80 determinations and section 8 notices.
[8] At the outset of the hearing on 15 January it became apparent that the appellant had not appealed to the Tribunal the 18 October 2017 regulation 80 determinations and section 8 notices. The hearing was therefore adjourned and a late appeal with HMRC consent in respect of these years was made on 22 January 2019. Both appeals have now been heard together and this decision is in respect of both appeals.
[9] It was accepted in the course of the hearing that this appeal concerned only the principle as to whether the Intermediaries Legislation applied. If the Tribunal determined that it did then it would be for the parties to try and agree the amount of tax due or otherwise revert to this Tribunal.
[10] The issue in this appeal is therefore whether the conditions for the application of the Intermediaries legislation are met, the burden of proof being on the appellant to demonstrate, on the balance of probabilities that this is not the case.
[11] There are two statutory tests within the Intermediaries Legislation, one in ITEPA for income tax purposes and one in the Social Security Contributions Regulations for national insurance purposes. Both parties accept and have proceeded on the basis that for the purposes of this appeal the test for income tax purposes and that for NICs are for all intents and purposes the same and only the legislation in ITEPA need be considered.
[12] The purpose of the IR35 legislation was set out by Robert Walker LJ as he then was in R (on the application of Professional Contractors' Group Ltd) v IR Commrs [2002] BTC 17 at [51]:
… the aim of both the tax and the NIC provisions (an aim which they may be expected to achieve) is 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.
[13] Where the legislation applies then the intermediary or personal services company is taxed broadly in line with the income tax and NICs regime for employees with credit given for tax actually paid through the personal services company arrangements.
[14] Sections 49 to 51 of ITEPA provides in so far as is relevant to this appeal;
49(1) This Chapter applies where–
- (a) an individual (the worker) personally performs, or is under an obligation personally to perform, services for another person (the client),
- (aa) the client is not a public authority,
- (b) the services are provided not under a contract directly between the client and the worker 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 or the holder of an office under client, orthe worker is an office-holder who holds that office under the client and the services relate to the office
(2) …
(3) …
(4) the circumstances referred to in subsection (1)(c) include the terms upon which the services are provided, having to the terms of the contract forming part of the arrangement under which the services are provided.
(4A) …
(5) in this Chapter “engagement to which this Chapter applies” means any such provision of services as is mentioned in subsection (1).
50(1) If, in the...
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