R & C Commissioners v RALC Consulting Ltd

In R & C Commrs v RALC Consulting Ltd [2024] BTC 513, the Upper Tribunal (UT) found that the First-tier Tribunal (FTT) had made material errors of law in its construction and application of the hypothetical contract between the worker and the end-client, in particular concerning mutuality of obligations. However, it declined to remake the decision because further findings of fact were required and so it remitted the case back to the FTT for reconsideration.

RALC Consulting Ltd (RALC), was the personal service company of Richard Alcock, an IT consultant, who was its sole director and shareholder. During the relevant tax years (6 April 2010 to 5 April 2015), RALC contracted via an agency with Mr Alcock’s former employer, Accenture UK Ltd (Accenture) and with the Department for Work and Pensions (DWP) – a client whose projects Mr Alcock had also previously worked on – to provide Mr Alcock’s services, mainly working on the Universal Credit IT project.

HMRC issued determinations and assessments on the basis that the intermediaries legislation (commonly known as IR35) applied to the contracts, so that PAYE and National Insurance should have been accounted for by RALC on the deemed employment payments. RALC appealed and the FTT held that IR35 did not apply – largely because it considered that there was insufficient mutuality of obligations in the hypothetical contracts between the worker and the end clients, so that those contracts would not have represented employment, but would instead have amounted to self-employment.

Unusually, an amended version of the FTT decision was subsequently issued. HMRC signalled its intention to appeal against the FTT decision, prompting the Judge at that Tribunal (Rupert Jones) to review the original decision. He concluded that there had been an error of law in the adequacy of reasoning and a revised version was issued which included additional deliberation in respect of mutuality of obligations between the contracting parties, though the outcome of the case remained unaltered.

Despite the published amendment, the UT found that the FTT had failed to properly follow the three-stage process outlined by the Court of Appeal in R & C Commrs v Atholl House Productions Ltd (Kaye Adams):

• Stage 1. Find the terms of the actual contractual arrangements ... and relevant circumstances within which Ms Adams worked.
• Stage 2. Ascertain the terms of the hypothetical contract ... postulated by section 49(1)(c)(i) and the counterpart legislation as applicable for the purposes of NICs.
• Stage 3. Consider whether the hypothetical contract would be a contract of employment.

The UT considered that the FTT had correctly directed itself to follow this procedure, but then had not properly done so, in that it failed to fully construct the terms of the hypothetical contracts before applying the common law tests for employment status. Instead, it had prematurely applied those common law tests (particularly with regard to mutuality of obligations) to certain aspects of the actual contracts. The result was that some aspects of the fully constructed hypothetical contracts were not taken into account.

The UT then went on to consider whether this error in law had a material effect on the outcome of the case and if so, whether it should set aside and/or remake the decision. In doing so, the UT found that the FTT had placed too much emphasis on the mutuality of obligations test. Whilst it is a requirement that there must be mutuality of obligations for employment to exist, it does not, of itself, indicate employment; it is necessary but not sufficient. In addition, the FTT had incorrectly found the lack of any guaranteed minimum hours and the right of the putative employer to terminate the arrangement without notice to be inconsistent with mutuality of obligations. This UT said that these conclusions were not supported by case law (Quashie v Stringfellows Restaurant Ltd[2012] EWCA Civ 1735), which established that neither is inconsistent whilst the contract subsists. Similarly, that the putative employer is not obliged to offer more work in the future does not prevent mutuality of obligations existing during the period that work is offered, the offer is accepted and for which the worker is paid (R & C Commrs v Professional Game Match Officials Ltd ).

The UT held that this was enough to warrant setting aside the decision of the FTT, but that there were insufficient findings of fact (which might require further witnesses and evidence) for it to remake that decision. Consequently, the case was remitted back to the FTT for the appeal to be heard by a new panel.

This case looks likely to remain unresolved for some considerable time – effectively the case will have to start afresh. It comes as no surprise that the original judgment should be set aside, given that the FTT had already identified errors in its own decision process before the case ever reached this point, but it was hoped that this hearing would be able to draw matters to a conclusion. However, the UT was not confident that it was in possession of all the relevant facts to do so. Unfortunately the UT can only base its judgments on the facts before it, whilst the FTT has the power to make further findings of fact, including to call witnesses and request further evidence.

Comment by Martin Jackson, Senior Tax Writer, Croner-i Ltd.