RALC Consulting Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 October 2019 |
| Neutral Citation | [2019] UKFTT 702 (TC) |
| Date | 29 October 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 702 (TC)
Judge Rupert Jones, Mohammed Farooq
Christopher Leslie, Tax adviser of Tax Networks Ltd appeared for the appellant
Nicholas Stone and Marianne Tutin, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – PAYE – NICs – Intermediaries legislation – IR35 – Personal Service Company – ITEPA 2003, s. 49 – Provision of IT consultancy services – Notional or hypothetical contracts to be constructed – Four links in chain between Mr Alcock, the appellant's personal service company (RALC) – The agencies (Networkers Recruitment Services Ltd and Capita Resourcing Ltd) and end clients, Accenture and DWP) – Notional contracts of service (employment) or contract for services (self-employed) – Ready Mixed Concrete test – Four year time limit under TMA 1970, s. 34 – Carelessness of appellant or its adviser under TMA 1970, s. 118 – Extended time limits of six years under TMA 1970, s. 36(1) or (1B) – Appeal allowed.
The First-tier Tribunal (FTT) allowed Mr Adcock's personal service company's appeal that the intermediaries legislation (IR35) under ITEPA 2003, s. 49 did not apply to the provision of IT consultancy services.
The appellant, RALC Consulting Ltd (RALC), was the personal service company (PSC) 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), the appellant contracted 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 previously worked on, (together the end clients) to provide Mr Alcock's services, mainly working on the Universal Credit IT project.
The contractual arrangements entered into by the appellant with Accenture and DWP were four-party chains: Mr Alcock; RALC; agency; and end clients. The agency for the Accenture contracts was Networkers Recruitment Services Ltd and for the DWP contract was Capita Resourcing Ltd. The Tribunal was satisfied it should concentrate on Mr Alcock's relationship with the end clients, Accenture and DWP.
HMRC contended that as Mr Alcock had continued to work for his former employer this implied an expectation of continued work. The intermediaries legislation in ITEPA 2003, s. 49 applied to the engagements during the relevant years. In each of those years, RALC agreed to provide the services of Mr Alcock to work full time on long-term engagements, usually at the client site, as part of the clients' team delivering substantial IT projects.
The FTT did not accept HMRC's submission that the long history of Mr Alcock's previous engagement and operation of the contract in practice led to an expectation that Mr Alcock would be provided with work every day during the course of an assignment, such that it crystallised into a legal obligation.
The FTT reached this conclusion based not only on the contractual terms, but also on their application in practice, acknowledging that in one contract with Accenture, the programme was stopped and therefore RALC's contract terminated early in January 2013, which resulted in RALC not being paid. There was therefore no question at all that Mr Alcock could have charged for just making himself available, and neither was the client obliged to give him work or allocate work, the work had already been agreed upfront.
The FTT concluded that it was not satisfied on balance that sufficient mutuality of obligations (as established as one of the conditions for a contract of service in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497) existed between Mr Alcock and the end clients in the notional contracts to establish an employment relationship. Although there was some mutuality of obligations in respect of the requirement for payment if work was done, it did not exist beyond the irreducible minimum in any contract to provide services nor demonstrated the relationship was one of a contract of service.
Since there was no minimum obligation to provide work and no ability to charge for just making himself available, it was clear that the key elements of mutuality, in the work, or wage bargain sense, were missing, and therefore Mr Alcock could not be considered an employee.
The Tribunal was satisfied that Mr Alcock had substantial control in practice and as of right in his contracts over how he performed his services for his clients, DWP and Accenture. There was some control over how Mr Alcock performed his services which was necessary to provide a quality of service for his clients and due to the nature of IT projects which required security and collaboration to deliver good results whether in contracts of service or for services. The Tribunal was satisfied that it was not such as to indicate an employee relationship in the notional contracts with DWP and Accenture.
The FTT also accepted that Mr Alcock's engagements permitted him to provide a substitute but the end clients had the right to refuse to authorise any substitute proposed if they were deemed unsuitable. Therefore, while it was a genuine right of substitution, it was a fettered right subject to the approval of his clients.
HMRC had sought to rely on an uncorroborated HMRC written note of a telephone conversation with a project manager, Mr Macpherson, who Mr Alcock had worked alongside for “at most three months” during his contract with DWP. The note stated that Mr Alcock had acted as Mr Macpherson's “deputy” by carrying out tasks on his behalf. HMRC recorded no verbatim transcript of the conversation and the project manager did not sign off the notes. Consequently, this evidence held little weight with the Tribunal, with the Judge stating that the evidence was hearsay and filtered through the medium of an HMRC note taker.
The FTT thus concluded that the intermediaries legislation did not apply as the hypothetical contracts with the end clients would have been contracts for services and Mr Alcock would have been self-employed. HMRC's determinations, decisions and notices were cancelled. The appellant was not liable to pay income tax and NICs assessed by HMRC. The appeal was allowed in full.
In the light of its conclusion that the intermediaries legislation did not apply, there was no need for the Tribunal to consider the second issue with regards to the extension of time limits or carelessness of the appellant or its adviser with regards to earlier returns.
The outcome of this decision rested largely on the interpretation of mutuality of obligation. HMRC's interpretation that where one party agrees to work for the other in return for payment, this satisfies mutuality of obligation between the two parties, was dismissed by the Tribunal. Again, this decision shows the inadequacy of HMRC's Check Employment Status for Tax (CEST) tool which does not consider mutuality of obligation.
[1] This appeal concerns the operation of IR35 or Intermediaries legislation, the purpose of which was explained by Judge Dean in Jensal Software Ltd [2018] TC 06501 at [2]–[3] in the following manner:
[2] 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.
[3] The effect of the legislation, where it applies, is to treat the fees paid to a service company not as company revenue upon which corporation tax is payable but rather as deemed salary to the worker which is subject to income tax and NIC. The legislation applies to those workers who would be treated for NIC and income tax purposes as being employed under a contract of service by the client were it not for the involvement of the personal service company or agency.
[2] As set out in the press release issued when IR35 was first introduced in 1999, the concern which the legislation was introduced to prevent, was that it was possible “for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged “consultant” paying substantially reduced tax and national insurance”.
[3] However, as Walker LJ emphasised in R (on the application of Professional Contractors' Group Ltd) v IR Commrs [2002] BTC 17, the Intermediaries legislation does not apply automatically where a person acts through a personal service company. He said, at [12] of the judgment, that it does not apply at all unless the relevant person's “self-employed status is near the borderline and so open to question or debate”; the whole regime is “restricted to a situation in which the worker, if directly contracted by and to the client “would be regarded for income tax purposes as an employee of the client”” as “determined on the ordinary principles established by case law …” This was referred to with approval by Henderson J in Dragonfly Consultancy Ltd v R & C Commrs [2008] BTC 639 at [10].
[4] It is apparent that IR35 is not restricted in its application only to cases involving artificiality or where there is an intention on the part of a taxpayer to avoid or reduce tax liabilities. For the Intermediaries legislation to apply, there is no requirement for HMRC to allege, nor the Tribunal to be satisfied, that there was any intention on the part of the taxpayer or notional employer to avoid or reduce tax liabilities whether this would be by creating artificial corporate structures or contracts for services or sham or fraudulent “self-employment” agreements.
[5] The Tribunal's duty is simply to assess the existing...
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