R & C Commissioners v Oriel Support Ltd
| Jurisdiction | England & Wales |
| Judge | Kenneth Parker QC |
| Judgment Date | 17 June 2008 |
| Neutral Citation | [2008] EWHC 1304 (Admin) |
| Docket Number | CO/803/2007 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 17 June 2008 |
[2008] EWHC 1304 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
THE ADMINISTRATIVE COURT
Royal Courts of Justice
Strand
London WC2A 2LL
Kenneth Parker Qc
CO/803/2007
Mr Walters QC appeared on behalf of the Claimant
Mr Mantle appeared on behalf of the Defendant
Background
In the United Kingdom a substantial market has developed for the provision of labour. A recruitment agency or labour provider is in the business of providing workers to other businesses (“end users”) who will use such workers, long-term or short-term, in their own operations. Such providers include well-known High Street names that provide mainly professional or skilled workers to end users. However, at the other end of the market there are “gangmasters” (who may fall within the scope of the Gangmasters (Licensing) Act 2004), providing to end users gangs of unskilled, often immigrant, workers, not only in the field of agriculture but also, for example, in food processing, cleaning, security, building and construction.
The defendants in this application, the Commissioners for Her Majesty's Revenue & Customs (“HMRC”), are naturally concerned that labour providers properly account for their PAYE income tax (“PAYE”) and Value Added Tax (“VAT”) liabilities; and that the incidence of debt owing to the Crown is minimised in the event of business failure or disappearance, contingencies to which this industry is especially prone. The claimant, Oriel Support Limited (“OSL”), is equally concerned that HMRC should not interpret income tax and VAT legislation incorrectly, with the result that OSL's legitimate business arrangements could be seriously undermined.
OSL's operations
OSL provides a complete financial outsourcing for labour providers who are clients of OSL. The chief services provided by OSL are: validation of input hours
from timesheets received from workers; processing of the pay for each worker;
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deduction of tax and employee's national insurance contributions and the calculation of employer's national insurance contributions; monthly payments of deductions to HMRC; production and posting of payslips to workers on a weekly basis; payment of net pay to workers on a weekly basis; raising and dispatching of sales invoices to end users, supported by timesheets signed by the relevant workers; providing a monthly or quarterly VAT schedule to the labour provider.
These services are provided under a standard contract, called “the Complete Financial Outsourcing Contract” (“the CFO”). The labour provider client of OSL (“the LPC”) enters into two relevant contracts with third parties. First, the LPC contracts with workers whose labour will be made available to end users through the LPC. Second, the LPC contracts with end users for the supply to them of the labour of those workers that are under contract to the LPC.
Under clause 2.1 of the CFO the LPC enters into the contract with the end user as agent of OSL, that is, it is OSL that is treated by the CFO as providing the labour supply services to end users. However, under clause 3.2 of the CFO the LPC
enters into the contract with workers as principal on its own behalf, and not as agent of OSL. Bearing in mind the well-known case of Nokes v Doncaster Amalgamated Collieries, Limited [1940] AC 1014, it was unclear to me how OSL could carry out the contract with end users by making available workers who were contracted exclusively to the LPC, unless those workers expressly or impliedly agreed that OSL was entitled to dispose of their services for that purpose. There was no express agreement produced, or any evidence shown upon which such an agreement could be implied. However, Mr Mantle, who appeared on behalf of HMRC, took no point on this particular aspect of the CFO.
Under the CFO the arrangements for payment are as follows. End users pay OSL in respect of the services carried out by workers contracted to the LPC. From those funds OSL pays the wages or remuneration of the workers contracted to the LPC; and also accounts to HMRC for PAYE and NICs associated with such payments. OSL then accounts to the LPC for the balance received from end users, after deducting its own fees and charges in respect of the services rendered under the CFO. This is the effect of terms 3.1 and 3.2 of the Standard Terms, Schedule 2 of the Operating Manual, referred to at clause 2.2 of the CFO; and clauses 2.4, 5.1, 5.2.1, 5.2.2., 5.2.3 and 7 of the CFO.
In short, if the end user agreed to pay £1000 for the services carried out by a particular worker contracted to the LPC; the workers' gross remuneration from the LPC was £500; and OSL's profit costs were £100, the LPC would receive from OSL a net amount of £400. This amount, of course, would correspond to the LPC's “gross margin”, that is, the difference between the amount agreed with the end user for the service received and the LPCs own costs of employing workers,
less the charges payable by the LPC to OSL. The LPC has, of course, its own additional costs of premises, staff and overheads that would reduce this gross margin.
The Issues
There are in essence three issues. First, HMRC contends that OSL may not account for PAYE under its own PAYE reference. Under regulation 2 of the PAYE Regulations (see paragraph 14 below), “employer reference” is the combination of letters or numbers or both used by HMRC to identify an employer for the purposes of the Regulations. HMRC allocates an employer reference to each employer in order to identify the employer on its records and IT systems. OSL has such a reference and uses that reference in any event to account for PAYE in respect of its own employees. HMRC maintains that it is the LPC which has the primary liability under the applicable legislation to account for PAYE in respect of the workers employed by the LPC. In so far as OSL makes payments of PAYE to HMRC in respect of such workers' remuneration, those payments must be made under the PAYE reference of the LPC who employs them. HMRC has made a decision to that effect. OSL contends that it may make such payments under it own reference (“the PAYE issue”).
Second, HMRC contends that OSL does not provide a service to end users of making workers available to such end users. It is the LPC that provides such a service, and it is, therefore, the LPC that must account for VAT upon the putative supply (“the VAT issue”). HMRC has made a decision on the VAT issue, and that decision is currently subject to appeal to the VAT and Duties Tribunal (“the
Tribunal”). I am not, therefore, directly concerned in this application with the legality, or correctness, of the main decision on the VAT issue.
Thirdly, HMRC made certain decisions, to which I shall refer later, requiring OSL to take appropriate steps to bring its accounting into line with HMRC's view as to the primary PAYE and VAT position; and also decisions indicating that LPCs would be informed of those views so that they in turn could take appropriate action in respect of their own accounting to HMRC (“the issue regarding the ancillary decisions”). OSL contends that each of these decisions was unlawful.
I shall now turn to the relevant legislation on the PAYE issue. The applicable legislation
Section 44 (treatment of agency workers supplied by agencies) of Chapter 7 (Application of Provisions to Agency Workers) of Part 2 (Employment Income: Charge to Tax) of the Income Tax (Earnings and Pensions Act) 2003 (“the 2003 Act”) provides as follows:
“This section applies if-
an individual (“the worker”) personally provides, or is under an obligation personally to provide, services (which are not excluded services) to another person (“the client”),
the services are supplied by or through a third person (“the agency”) under the terms of an agency contract,
the worker is subject to (or to the right of) supervision, direction or control as to the manner in which the services are provided, and
remuneration receivable under or in consequence of the agency contract does not constitute employment income of the worker apart from this Chapter.
if this section applies -
the services which the worker provides, or is obliged to provide, to the client under the agency contract are to be treated for income tax purposes as duties of an employment held by the worker with the agency, and
all remuneration receivable under or in consequence of the agency contract (including remuneration which the client pays or provides in relation to the services) is to be treated for income tax purposes as earnings from that employment.”
Section 47 (Interpretation of this Chapter) of the 2003 Act provides, so far as is relevant:
“In this Chapter “agency contract” means a contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client.
For the purposes of this Chapter “remuneration” -
does not include anything that would not have constituted employment income of the worker if it had been receivable in connection with an employment apart from this Chapter, but
subject to paragraph (a), includes every form of payment, gratuity, profit and benefit.”
Regulation 10 of the Income Tax (Pay As You Earn Regulations) 2003 (“the Regulations”) provides:
“For the purposes of these Regulations -
agencies are treated as employers; and
agency workers are treated as employees”
Regulation 12 (Application to other payers and payees) provides:
“For the purposes of these Regulations -other...
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