Synaptek Ltd v Young (Inspector of Taxes)

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr Justice Hart,The Honourable Mr Justice Hart
Judgment Date28 Mar 2003
Neutral Citation[2003] EWHC 645 (Ch)
Docket NumberCase No: CH/2002/APP/0777

[2003] EWHC 645 (Ch)



Royal Courts of Justice

Strand, London, WC2A 2LL


The Honourable Mr Justice Hart

Case No: CH/2002/APP/0777

Synaptek Limited
Mr Graeme Young (HM In$pector Of Taxes)

Mr Conrad McDonnell (instructed by Bond Pearce) for the Claimant

Mr Clive Sheldon (instructed by Solicitor of Inland Revenue) for the Defendant

Hearing dates 27 th and 28 th February 2003

Handdown Judgment 28 th March 2003

Approved Judgment

I direct that pursuant to CPR PD 39A para 6 1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic

The Honourable Mr Justice Hart Mr Justice Hart

This is an appeal by way of case stated against the decision of the General Commissioners for the South Shields Division of Tyne and Wear dated 4 th September 2002 dismissing an appeal by Synaptek Limited ("Synaptek") against a Notice of Decision of the Inland Revenue dated 30 th April 2001 in the following terms:

"That the circumstances of the arrangements between Gordon Stutchbury and EDS for the performance of services from 1 May 2000 to 29 October 2000 are such that, had they taken the form of a contract between Gordon Stutchbury and EDS, Gordon Stutchbury would be regarded for the purposes of Parts I to V of the Social Security (Contributions and Benefits) Act 1992 as employed in employed earner's employment by EDS.

That Synaptek Limited is treated as liable to pay primary and secondary Class 1 Contributions in respect of the worker's attributable earnings from that engagement."


The case concerns the application of what is popularly known as the IR35 legislation, the background to which is explained in the judgments of Burton J at first instance and Robert Walker LJ on appeal in On the application of Professional Contractors Group Limited, R v IRC [2001] STC 659, [2002] STC 165. That legislation (for income tax purposes contained in Finance Act 2000, and for social security purposes contained in the Social Security Contributions (Intermediaries) Regulations 2000) applies typically to small "service" companies which provide the services of a particular individual to a client who requires those services. This case concerns the latter regulations ("the Regulations"). In the present case Synaptek was the service company, Gordon Stutchbury ("Mr Stutchbury"), a software engineer, the individual whose services were supplied, and (subject to a wrinkle which I mention below) EDS the client to whom the services were supplied. The position is additionally complicated by the fact that there was no contractual relationship between Synaptek and EDS Synaptek's agreement to provide the services was made with NES Computer Services Limited ("NESCO"). EDS was itself providing services (as successor to the government IT Services Agency ("ITSA")) the Benefits Agency at the Inland Revenue site at Longbenton.


Regulation 6(1) provides as follows:

"(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 Part 1 to V of the Contributions and Benefits Act as employed in employed earner's employment by the client"


It was common ground that Synaptek was an "intermediary" for the purposes of the Regulation, that Mr Stutchbury personally performed services, and that (subject to the wrinkle) those services were provided for the purposes of a business carried on by EDS. It was accepted by Synaptek that "the arrangements" included the terms of the contract between Synaptek and EDS and the terms of the contract between EDS and NESCO, and that "the circumstances" referred to in Regulation 6(l)(c) include the arrangements and the detail of the day to day performance of those contracts, including any matters not expressly stipulated in those contracts.


The General Commissioners, after reciting that Mr Stutchbury had given oral evidence to them and listing documentary material which had been placed before them, expressed their findings of fact as follows:

"5.1 Mr Stutchbury is a consultant in software engineering and is in business on his own account. Following a number of employments, including a technical apprenticeship at NEI Reyrolle (switchgear manufacturers) and a period in the Police Force, he sought a career in computing. He qualified in 1987 and worked initially for a nuclear medicines company in Surrey.


In 1990 Mr Stutchbury purchased an off-the-shelf company Sisterfield Ltd, whose name he subsequently changed to Synaptek Ltd, the Appellant in this case. Mr Stutchbury and his wife are the only shareholders and directors. Mrs Stutchbury is also the Secretary of the Company and is responsible for the administration. This has involved visits from the Contributions Agency and from the VAT Inspector and contact with the company's accountants. Mr Stutchbury has made substantial investment in his company and the Accounts to 30.04.01 show the accumulated cost of Computer Equipment to be £29,835. The Appellant had in the past engaged a total of four employees and had undertaken work for many customers in its twelve year history.


EDS is an American Company which has a number of Government contracts including one to supply computer software and services to the Benefits Agency at Longbenton, Newcastle upon Tyne. EDS do not have sufficient permanent staff for this work and so recruit additional help. EDS do not deal directly with suppliers of consultancy services, particularly smaller businesses such as the Appellant. When engaging suppliers, EDS use the services of agencies, for, example NESCO. The agency is responsible for payment to the Appellant and, if the agency goes into liquidation, the Appellant will not be paid.


On 15 December 1999 the Appellant entered into an agreement with NESCO under which Mr Stutchbury was to undertake work for ITSA – DSS at Longbenton, Newcastle upon Tyne. The role of ITSA was subsequently taken over by EDS through the terms of the agreement of 15 December 1999 continued to be observed without any material difference to the Appellant or to Mr Stutchbury. For the period referred to in the Notice of Decision, therefore, the work was to be undertaken for EDS.


The Agreement of 15 December 1999, applied to the relevant period, contained the following features:

(i) The Appellant would secure that Mr Stutchbury carried out the services required by EDS

(ii) The services were to be carried out at the DSS building at Longbenton though that location could be changed by agreement between the Appellant and NESCO at any time.

(iii) It was open to any of the three parties, NESCO, the Appellant or EDS, to terminate the agreement by four weeks written notice to other two parties. Further, it was open to EDS or NESCO to terminate the Agreement with immediate effect if Mr Stutchbury failed to carry out the services to the satisfaction of EDS.

(iv) Mr Stutchbury was to work for at least 37.5 hours per week and payment would be at the hourly rate of £42. There would be no sick pay or holiday pay. The cost of travelling to work was provided for in the hourly rate. Each week Mr Stutchbury was to complete a timesheet which had to be authorised by EDS and submitted to NESCO. Payment would only be made by NESCO on production of a duly completed timesheet and an appropriate invoice.

(v) In the interest of continuity, the Appellant was to procure that the work was undertaken by Mr Stutchbury personally. The Appellant could substitute alternative personnel but only with the approval of EDS.

(vi) The Appellant would remain the employer of Mr Stutchbury.

(vii) The intellectual property in the software developed by Mr Stutchbury was to belong to EDS.


Mr Stutchbury was an expert in his field. He worked on two projects at Longbenton. Subject to problems arising on either project, it was up to Mr Stutchbury how he did the work and when he did it. He did not take his own staff with him. For the most part he worked alongside employees of EDS. From time to time, when requested, he would go to the aid of employees of other firms on the site. He did not seek permission, though usually informed a co-worker or the job manager as a matter of courtesy. The time involved was included in his normal timesheet to NESCO, Mr Stutchbury did not work any fixed hours. He was inclined to work longer hours at the beginning of the week. Mrs H Docherty, an employee of EDS, was his Line Manager and she managed the projects


Site security was controlled by the Inland Revenue who had the ultimate say on who could enter, and this extended to everyone. Mr Stutchbury was issued with a Pass.


Mr Stutchbury did not use his own equipment on the site but he did take his own books for reference.


At various times during the course of his involvement with EDS, Mr Stutchbury undertook other work for unconnected parties including PTS Services and Ainleys This was in his own time, largely in the evenings and at weekends.


Although there was a right of substitution in the event, for example, of Mr Stutchbury's illness, consent was never sought. Any substitute would have had to be suitably qualified and meet with the approval of EDS. Mr Stutchbury would have been a good judge of suitable qualification since he had successfully introduced three individuals to EDS. Mrs Stutchbury could not have acted as a...

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    ...but in the High Court the decision of the Commissioner can only be effectively challenged on grounds that it was wrong in law. In Synaptek Ltd v Young [2003] STC 543, [2003] EWHC 645 (Ch), at page 553 Hart J said (in a case which arose under the same IR35 statutory provisions as the presen......
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    ...the client.” 12 The nature of the exercise which the court has to perform under regulation 6(1) was helpfully described by Hart J in Synaptek Ltd v Young [2003] EWHC 645 (Ch), [2003] ICR 1149, in a passage which merits quotation in full. It is helpful not only for Hart J's analysis of the ......
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    ...among others in assessing the weight to be given to it, when deciding the status of the hypothetical contract (Synaptek Ltd v YoungTAX[2003] BTC 8044). 90. According to the Respondents the work undertaken by Mr Shepherd for the Tote during the contract with Gerling NCM was insufficient to s......
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