Usetech Ltd v Young (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 12 March 2004 |
| Date | 12 March 2004 |
| Court | Special Commissioners |
special commissioners decision
Colin Bishopp
David Smith of Accountax for the taxpayer
The inspector in person
NATIONAL INSURANCE CONTRIBUTIONS - intermediary rules ("IR35") - whether worker to be regarded as in "employed earner's employment by the client" - Social Security Contributions (Intermediaries) Regs 2000, reg 6 - yes - appeal dismissed INCOME TAX - Finance Act 2000 schedule 12 subsec-or-para 1FA 2000, Sch 12 para 1 - whether worker to be regarded as an employee of the client - yes - appeal dismissed
1. The taxpayer company, Usetech Limited, traded from 1996 to 2003. Its shareholders and officers were William Hood and his wife, but only Mr Hood was actively engaged upon the company's business, and there were at no time any other employees. The company ceased to trade when Mr Hood became seriously ill, and incapable of working. His skills lay in the production of design drawings of oil wells, rigs and similar equipment. In particular, he is, or was, a specialist in the use of a software product known as Pro-Engineer, which produces 3-D models of such equipment. The company's business was, in effect, the hiring out of Mr Hood to various companies engaged in the oil industry.
2. Between 1996 and 2000 Mr Hood undertook work for various companies; in his evidence he identified four engagements. The first was with ABB Vetco Gray ("ABB"). The taxpayer's contract with ABB was effected through the medium of an agency, NES International Limited ("NES"). Mr Hood was interviewed by ABB before it agreed to engage him, although there was at no time any contract between ABB and Mr Hood, nor between ABB and the taxpayer. ABB contracted with NES which in turn contracted with the taxpayer for the provision of Mr Hood's services. The engagement lasted for about 8 months, from June 1996 to February 1997. From then until June 2000 Mr Hood undertook work for companies other than ABB, save for a period of about three months during which the taxpayer was unable to secure any work for him.
3. In May 2000 the taxpayer entered into a further contract with NES for the provision of Mr Hood's services to ABB. The contract was initially expected to be of quite short duration - a matter of weeks - but in fact Mr Hood remained for some 17 months. The taxpayer then secured a further short-term contract with another company before again agreeing with NES to supply Mr Hood's services to ABB; it did so from February 2002 until Mr Hood ceased work in May 2003.
4. I am concerned in this appeal only with the period from 1 June 2000 to 30 March 2001 inclusive, during the whole of which Mr Hood's services were supplied to ABB. The Revenue contends that the supply comes within what are colloquially referred to as the "IR35" rules, and are identified more specifically as regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000/727) which deals with national insurance contributions, and Schedule 12 to the Finance Act 2000 which deals with income tax. Regulation 6 of the 2000 Regulations is in these terms:
(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 Parts I to V of the [Social Security] Contributions and Benefits Act [1992] as employed in employed earner's employment by the client.
Paragraph (1)(b) has effect irrespective of whether or not -
(a) there exists a contract between the client and the worker, or
(b) the worker is the holder of an office with the client.
(2) Where these Regulations apply -
(a) the worker is treated, for the purposes of Parts I to V of the Contributions and Benefits Act, and in relation to the amount deriving from relevant payments and relevant benefits that is calculated in accordance with regulation 7 ('the worker's attributable earnings'), as employed in employed earner's employment by the intermediary, and
(b) the intermediary, whether or not he fulfils the conditions prescribed under section 1(6)(a) of the Contributions and Benefits Act for secondary contributors, is treated for those purposes as the secondary contributor in respect of the worker's attributable earnings
and Parts I to V of that Act have effect accordingly.
Any issue whether the circumstances are such as are mentioned in paragraph (1)(c) is an issue relating to contributions that is prescribed for the purposes of section 8(1)(a) of the Social Security (Transfer of Functions etc) Act 1999 (decision by officer of the Board).
5. The corresponding provisions of Schedule 12 to the 2000 Act, so far as they are material, read:
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(1) This Schedule applies where -
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(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'),
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(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ('the intermediary'), and
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(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client …
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(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 …"
6. I omit the remaining provisions of Schedule 1. Although they are relevant to the taxpayer's liability, it was agreed by the parties that I need not concern myself with them since the appeal is to be resolved on narrower grounds.
7. Formally, this is an appeal against a decision made on 18 January 2002 under section 8 of the Social Security (Transfer of Functions Act) Act 1999 in respect of regulation 6, and a further decision of the same date made under regulation 49 of the Income Tax (Employments) Regulations 1993 (SI 1993/744) in respect of Schedule 12, the combined effect of which, if they are correct, is that Mr Hood is to be treated for national insurance and income tax purposes as if he were an "employed earner" of the taxpayer; the consequence will be that the taxpayer is required to account for national insurance contributions and income tax accordingly: see regulation 2(1) and Schedule 12 paragraph 2(1) respectively. I am not asked to consider the amounts of national insurance contributions and tax due, but merely the correctness of the decisions. Although, as the extracts I have set out show, the legislative provisions for national insurance and income tax differ slightly, the test and the relevant considerations to be adopted in applying it are essentially the same in each case.
8. It was accepted by David Smith, representing the taxpayer, that paragraphs (1)(a) and (1)(b) of each set of provisions were satisfied, that Mr Hood was "the worker" and that ABB was "the client", although it should be pointed out that he accepted, in relation to paragraph 1(a) of each set of provisions, only that Mr Hood in fact personally performed the work, and not that he was under an obligation to do so. He accepted too that if these provisions apply, the taxpayer is the "intermediary". The dispute between the parties was, in essence, whether the slightly different tests prescribed by paragraph (1)(c) of each set of provisions were satisfied. The wording of the provisions, requiring an examination of "the circumstances", indicates that the test is primarily factual, although the authorities show that there are also issues of law, and guidelines to be followed in evaluating the facts; in other words, I must examine the facts in the light of the existing case-law. I agree with the view expressed in Lime-IT v Justin [2003] STC (SCD) 15 that, while the "contract" between the client and the worker may be hypothetical, it is necessary to consider the actual, rather than any hypothetical, facts of the case. I turn, therefore, first to consider the evidence. I heard from Mr Hood, from Gerald Parker, a Revenue officer who made enquiries into the circumstances of Mr Hood's engagement, from Alexander Hunter, ABB's human resources manager and from Paul White, ABB's engineering manager. I find the following facts.
9. ABB is in the business of providing equipment for the oil and gas industry. It has a core staff of 750 to 850 permanent employees, but supplements that staff, when demand requires, by taking on what Mr Hunter described as "sub-contract employees". The company's needs were identified by those (such as Mr White) in charge of its various activities and were notified to Mr Hunter and his team, who satisfied the need by taking on temporary staff. They did so, in every case, by means of specialist agencies of which NES was one. ABB would in no circumstances enter into a direct contractual relationship with a temporary staff member. As it happens, an offer of permanent employment (which would have been by way of direct contract between ABB and him) had been made to Mr Hood, but he declined it for family reasons. The fact that ABB had sufficient confidence in him to offer permanent employment did not alter the manner in which they were willing to engage him temporarily - he had to come through an agency. However, although temporary workers were always engaged through agencies, it was ABB's practice to...
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