Usetech Ltd v Young (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Park |
| Judgment Date | 08 October 2004 |
| Neutral Citation | [2004] EWHC 2248 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2004/APP/0271 |
| Date | 08 October 2004 |
[2004] EWHC 2248 (Ch)
The Honourable Mr Justice Park
Case No: CH/2004/APP/0271
Simon Devonshire (instructed by Nelsons) for the Appellant
Akash Nawbatt (instructed by the Solicitor of Inland Revenue) for the Respondent
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.
Mr Justice Park :
Abbreviations, dramatis personae, etc
These are as follows.
Overview
| ABB | ABB Vetco Gray (UK) Limited, the 'end user' of the services of Mr Hood; a company which provided a range of equipment to the oil and gas industry. |
| Mr Devonshire | Simon Devonshire, counsel for Usetech. |
| EAT | Employment Appeal Tribunal. |
| Hood, Mr | William Hood, specialist in a software system used by ABB, called Pro-Engineer; shareholder in and director of Usetech. |
| IR35 | The reference number of an Inland Revenue Press Release of 2000, which led to the enactment of the legislative provisions which are in point in this case. |
| Nawbatt, Mr | Akash Nawbatt, counsel for the Inspector of Taxes, the respondent to this appeal. |
| NES | NES International Limited, a company described as an agency company which provided technical recruitment services. |
| NICs | National Insurance Contributions |
| Usetech | Usetech Limited, the appellant on this appeal; 'one man company' owned by Mr Hood, which provided his services to end users. |
This is a tax and NICs appeal by the taxpayer, Usetech, against a decision of a Special Commissioner, Mr Colin Bishopp, dated 12 March 2004. The decision determined a question of principle concerning the liability to tax and NICs of Usetech and its principal shareholder and director, Mr Hood. Usetech was a 'one man company' whose business consisted of making the services of Mr Hood available to third party users. By transactions entered into in May 2000 Mr Hood's services were made available to ABB, and he worked in the business of ABB for about 17 months from 1 June 2000. The transactions involved not only Mr Hood, Usetech and ABB, but also, in a manner which I will describe later, another company, NES. Mr Hood had no beneficial interest in NES. The question of principle is whether the transactions attracted the operation of provisions introduced, both for tax and for NICs, in 2000 and commonly referred to as the IR35 legislation. IR35 was the reference number of an Inland Revenue Press Release which had foreshadowed the legislation.
If the IR35 legislation applied its effect would be to treat payments received by Usetech for the provision by it of Mr Hood's services (the payments being received, not from ABB directly, but from NES) as if they had been personal income of Mr Hood from an employment with ABB. For income tax they would be treated as emoluments taxable under Schedule E, rather than as receipts of Usetech's trade which would be taken into account in computing its profits liable to corporation tax. For NICs they would be treated in a similar way as employment income of Mr Hood. The liabilities both to income tax and to NICs would fall to be met by Usetech, not by Mr Hood. Thus it is Usetech which is the appellant taxpayer.
The Inland Revenue issued formal decisions that the IR35 provisions applied, and Usetech appealed to the Special Commissioners. In form there were two decisions and two appeals, one for tax and one for NICs, but they turned on two sets of almost identical legislation and stood or fell together. The appeals were heard by Mr Bishopp on 22 January 2004, and by a reserved decision dated 12 March 2004 he dismissed the appeals, thus affirming the decisions which the Inland Revenue had issued. Usetech now appeals to me. It is clear that an appeal can only succeed if the decision was wrong in law. There is no appeal on a question of fact: see s.56A(1) and (4) of the Taxes Management Act 1970.
Mr Devonshire, who appears for Usetech, has helpfully limited his submissions to two specific respects in which he says that the Special Commissioner erred in law. I will describe them fully later in this judgment. The first respect involves an argument that the IR35 legislation cannot apply because of a contractual provision between Usetech and NES (not between Usetech and ABB or between NES and ABB), which Mr Devonshire submits must be taken into account, entitling Usetech to provide the services of a substitute in place of Mr Hood. I will refer to this as the right of substitution argument. The second respect in which Mr Devonshire says that the Special Commissioner erred involves an argument that ABB was not obliged to provide work for Mr Hood to do (although in fact it did do so). Therefore, it is argued that, even after applying the hypotheses required by the IR35 provisions, there was insufficient mutuality of obligation for an employer/employee relationship to exist, with the result that the provisions did not apply. I will refer to this as the want of mutuality argument.
I have considered Mr Devonshire's arguments carefully, but my conclusion is that I cannot accept either of them. The issues are too complex for me to encapsulate the essence of my reasoning in this overview at the beginning of my judgment. I shall explain it as the judgment progresses. The result is that I respectfully agree with the decision of the Special Commissioner. Therefore I shall dismiss the appeal.
The IR35 legislation
For income tax and corporation tax (income tax so far as concerns Mr Hood and corporation tax so far as concerns Usetech) the legislation is contained in section 60 of and Schedule 12 to the Finance Act 2000. The critical provisions are those which identify the cases to which Schedule 12 applies. If the Schedule applies there is not, if I understand correctly, any dispute as the consequences. The dispute is whether it applies at all. The case revolves around provisions in paragraph 1 of the Schedule. I will now set out the relevant parts of the paragraph, interpolating in italicised square brackets the actual identities in this case of the parties referred to in general terms in the paragraph.
1 (1) This Schedule applies where –
(a) an individual ('the worker') [Mr Hood] personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ('the client') [ABB],
(b) the services are provided not under a contract directly between the client [ABB] and the worker [Mr Hood] but under arrangements involving a third party ('the intermediary') [Usetech], and
(c) the circumstances are such that, if the services were provided under a contract directly between the client [ABB] and the worker [Mr Hood], the worker would be regarded for income tax purposes as an employee of the client [ABB].
(2), (3) …
(4) The circumstances referred to in sub-paragraph (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.
In the quotation of sub-paragraph (1)(b) above I have identified 'the intermediary' in this case as being Usetech. As I will explain later, on the facts NES might also be regarded as an intermediary in the general sense of the word, but it is clear from paragraph 3 of Schedule 12, which I need not set out verbatim, that only Usetech counts as an intermediary for the purposes of paragraph 1. However, the 'arrangements involving … the intermediary' (referred to in sub-paragraph (1)(b)) may involve other persons as well as the intermediary. If they do the respects in which the other persons are also involved may affect the application or non-application of paragraph 1. In the present case this could be relevant to the participation of NES in the entire transaction: NES was neither 'the worker' nor 'the client' nor 'the intermediary', but it was involved in the arrangements in which 'the intermediary' (Usetech) was involved, so its part in those arrangements falls to be taken into account as well as Usetech's part in them.
A more general point of construction is worth spelling out at this stage. The conditions of sub-paragraphs (a) and (b) involve an analysis of the actual facts and legal relationships, but when that analysis shows that those two sub-paragraphs are satisfied sub-paragraph (c) involves an exercise of constructing a hypothetical contract which did not in fact exist, and then enquiring what the consequences would have been if it had existed. There may be room in some cases for dispute about what the hypothetical contract would contain, and in the present case there is. The dispute arises in connection with the right of substitution argument which is advanced by Mr Devonshire on behalf of Usetech. I will explain how precisely the issue arises at a later stage in this judgment.
The comparable provisions for NICs are contained in regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000. They are not quite identical to the provisions in the Finance Act 2000, but they are similar in all relevant respects. For completeness I will set out the specific wording.
6 (1) These Regulations apply where –
(a) an individual (the worker) [Mr Hood] personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (the client) [ABB],
(b) the performance of those services by the worker [Mr Hood] is carried out, not under a contract directly between the worker [Mr Hood] and the client [ABB], but under arrangements involving an intermediary [Usetech], and
(c) the...
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