[2011] UKFTT 174 (TC)

TC01043

Appeal number: TC/2010/00452

Appeal against determinations made under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 and a decision under Section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999 on basis that the taxpayers came within the agency legislation – appeal allowed in part as a result of exclusions

FIRST-TIER TRIBUNAL

TAX 

	SERPOL LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MRS.S.M.G.RADFORD (TRIBUNAL JUDGE)						MRS.R.WATTS DAVIES F.C.I.P.D M.I.H.		

Sitting in public at 45 Bedford Square, London WC1 on 11 January 2010

Mr.M.Boddington for the Appellant

Mr.C.Williams for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against the determinations made under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 (“Regulation 80 Determinations”) for the six tax years ending 5 April 2008 and a decision under Section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999 (“Section 8 Decision”) in respect of the same earnings.
2.	The underlying basis of the Regulation 80 Determinations and the Section 8 Decision was that the Appellant was acting as an agency supplying certain workers to Bedfordshire Police and as such the workers fell within the ambit of the agency legislation.
3.	David Tomlinson, Managing Director of the Appellant gave evidence for the Appellant. Paul Coombs, Detective Superintendent at Bedfordshire police gave evidence for HMRC.
The Legislation
4.	The relevant legislation for NIC purposes is Regulation 2 and Schedule 1 of the Social Security (Categorisation of Earners) Regulations 1978 (“the NIC Regs”).
5.	Regulation 2 is a deeming provision providing that individuals who are engaged in the circumstances set out in Schedule 1 are deemed to be in employed earner’s employment, and thus subject to Class 1 NIC.
6.	The material provisions of Schedule 1 are:
Employment…in which the person employed renders, or is under obligation to render, personal service and is subject to supervision, direction or control, or to the right of supervision, direction or control, as to the manner of the rendering of such service and where the person employed is supplied by or through some third person…
7.	There is an exclusion from this deeming provision which states that the deeming provision does not apply
where the service of the person employed is rendered in his own home or on other premises not under the control or management of the person to whom the person employed is supplied (except where such other premises are premises at which the person employed is required, by reason of the nature of the service, to render service)…

8.	The relevant legislation for PAYE purposes is different depending on the period of the PAYE Determination.  For the period from 6 April 2002 to 5 April 2003, Section 134 of the Income and Corporation Taxes Act 1988 (“ICTA”) is the relevant legislative provision. For the period from 6 April 2003 to 5 April 2008 Sections 44 and 47 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) are the relevant legislative provisions.

9.	Section 134 of ICTA states:
(1)	Subject to the provisions of this section, where—.

(a)	an individual (“the worker”) renders or is under an obligation to render personal services to another person (“the client”) and is subject to, or to the right of, supervision, direction or control as to the manner in which he renders those services; and

(b)	the worker is supplied to the client by or through a third person (“the agency”) and renders or is under an obligation to render those services under the terms of a contract between the worker and the agency (“the relevant contract”); and

(c)	remuneration receivable under or in consequence of that contract would not, apart from this section, be chargeable to income tax under Schedule E,

then, for all the purposes of the Income Tax Acts, the services which the worker renders or is under an obligation to render to the client under that contract shall be treated as if they were the duties of an office or employment held by the worker, and all remuneration receivable under or in consequence of that contract shall be treated as emoluments of that office or employment and shall be assessable to income tax under Schedule E accordingly.

10.	There is an exclusion which states:
	(5) Subsection (1) above shall not apply—

(b)	if the services in question are rendered wholly in the worker’s own home or at other premises which are neither under the control or management of the client nor premises at which the worker is required, by reason of the nature of the services, to render them…

11.	Section 44 of ITEPA states:
(1)	This section applies if—

(a)	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"),

(b)	the services are supplied by or through a third person ("the agency") under the terms of an agency contract,

(c)	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

(d)	remuneration receivable under or in consequence of the agency contract does not constitute employment income of the worker apart from this Chapter.

(2)	If this section applies—

(a)	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

(b)	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.

12.	The exclusion is at Section 47 of ITEPA:
(1)	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.

(2)	In this Chapter "excluded services" means—
…
(b)	     services provided wholly—

(i)	in the worker's own home, or

(ii)	at other premises which are neither controlled or managed by the client nor prescribed by the nature of the services…

Background and Facts
13.	In 2005 HMRC began enquiries into the status of the workers supplied by the Appellant to Bedfordshire Police. They were concerned that although these workers were treated by the Appellant as self employed, the Appellant might not have fully considered the agency legislation.
14.	The Appellant duly supplied all the information requested including the various contracts between it and the workers and the Appellant and its clients.
15.	After a long period of correspondence, telephone calls and a meeting HMRC decided that the workers were subject to the agency legislation and on 5 November 2008 a notices of a Section 8 Decision and Regulation 80 Determinations were made by HMRC respect of earnings by the workers.
16.	The Section 8 Decision notice was addressed to the Appellant’s accountants but did not contain the Appellant’s name. It merely stated “Class 1 NIC is due for the individuals supplied to Bedfordshire Police who should have been treated as employed earners”.
17.	After the notices were issued HMRC continued with its enquiries. The Appellant’s agent asked for a review of the notices on several occasions which was not granted and the Appellant eventually appealed to the Tribunal.
18.	David Tomlinson, Managing Director of the Appellant, confirmed his witness statement. He said that he was a retired police officer of thirty-four years experience who had retired from the Bedfordshire Police as a Detective Chief Superintendent in May 2002.
19.	At the time he retired he was asked to continue to provide his services as there was a lack of experienced officers and the resources of Bedfordshire Police were particularly stretched due to a major enquiry.
20.	Along with his friend, Peter Platt he set up the Appellant. Peter Platt was responsible for administration and his wife Stephanie was the Company Secretary.
21.	Mr Tomlinson said that there were important distinctions between what the Appellant did and an agency simply providing staff. The only similarity to an agency was that the Appellant billed on an hourly basis because the work did not lend itself to cost on a fixed time or price basis.
22.	He stated that the Appellant’s workers were not subject to any control by their client. They were offered a project which they were free to accept or decline, they decided when the job was to be done and if there was scope to work at home then they did so. It was invariably the case that those workers who were retired police officers would have more experience and knowledge than those allocating the project and would not need to be told how to do the job.
23.	Although HMRC had singled out Bedfordshire Police for their enquiries other clients included the British Transport Police, Hertfordshire Police, the Serious Crime Squad and private companies such as Wetherspoons and a chain of cinemas.
24.	The Appellant might supply the services of investigating officers such as to complete a fraud enquiry where there was no supervision or direction due to the complexity of the case.
25.	The Appellant also provided the services of project managers and has provided reviews of policy to ensure compliance with the Home Office regulations and legislation. Some of these projects were completed by the workers at home.
26.	The Appellant provided a witness statement service. Witness statements of the type the Appellant was engaged to obtain were not taken at the police station. They might be taken at homes, offices, banks or business premises. The place at which they were interviewed was determined solely by the witness’s preference and not by Bedfordshire Police. The location was irrelevant and not prescribed by the Bedfordshire Police or by anyone else or by any other requirement. The associate would call the witness who would dictate where he wished to be interviewed. The time of the interview was also at the witness’s choice.
27.	The Appellant had also been asked to provide workers who were experienced scenes of crimes officers.
28.	The workers signed a contract with the Appellant and a sample of this was produced to the Tribunal. They did not receive holiday or sick pay.
29.	Two of the relevant clauses contained within the contract were firstly that Clause 3 of the contract “On receiving and accepting a request from the Company, the Associate shall undertake the job and he/she shall ensure the job is completed in accordance with the Client’s wishes in the time stated by the Client if specified” and secondly Clause 11 of the contract “This agreement is personal to the Associate who may not, without written consent of the Company, assign or sub-contract or otherwise delegate any of his/her obligations hereunder”.
30.	Mr Coombs confirmed that during the period April 2002 and April 2008 Bedfordshire Police had used the services of the Appellant. The workers provided were used in a number of roles.
31.	They were used as investigation officers to complete witness statements, to check the quality of the crime investigation and also sometimes as part of a team. In some cases they would be given a deadline to complete the work but within this parameter they would be free to do the work when they wanted.
32.	Mr Coombs said that the workers were mainly ex Bedfordshire police officers so they were fully trained with regards to the project required. Although he would expect the associates to carry out the projects with little supervision, overall Bedfordshire Police ultimately had the right to supervise and control the manner in which the project was done.
33.	The workers were also used to assist with the national computer system as disclosure officers, exhibit officers and indexers. All of this work would be completed at the desk and if unsure as to how any piece of work was to be done the Senior Investigating Officer would have the final say.
34.	Mr Coombs said that the workers were also used as scenes of crime officers (“SOCOS”) in which case they would attend the scene of the crime in order to examine it and take fingerprints and DNA swabs. The Resource Manager would have the right to organise the manner in which the job was done.
35.	Finally the workers were used as project managers but HMRC agreed that workers in these positions were accepted by them not to fall within the agency legislation.
Appellant’s Submissions
36.	Mr Boddington submitted that the Section 8 Decision was invalid, as it did not comply with Regulation 3 of the Social Security Contributions (Decisions and Appeals) Regulations 1999.
(1)	Regulation 3 of the above Regulations states:
 (1) A decision which, by virtue of section 8 of the Transfer Act or Article 7 of the Transfer Order, falls to be made by an officer of the Board under or in connection with the Social Security Contributions and Benefits Act 1992, the Social Security Administration Act 1992, the Social Security Contributions and Benefits (Northern Ireland) Act 1992, the Social Security Administration (Northern Ireland) Act 1992, the Jobseekers Act 1995 or the Jobseekers (Northern Ireland) Order 1995—

(a)	must be made to the best of his information and belief, and

(b)	must state the name of every person in respect of whom it is made and—

(i)	the date from which it has effect, or

(ii)	the period for which it has effect.

37.	Mr Boddington submitted that the Section 8 Decision did not state the name of every person in respect of whom it was made.  The Appellant therefore did not know to whom the decision was intended to apply. It was understood that no individuals had been served a copy of the Section 8 Decision and thus had had no opportunity to exercise any right of appeal themselves as to the decision that they were employed earners.  Such individuals were likely to have paid Class 2 and possibly Class 4 NIC Contributions in their own right as self-employed individuals.
38.	The Section 8 Decision did not state the date from which it had effect, although it was expressed in the past tense which suggested that the decision concerned a retrospective period; neither did the Section 8 Decision state the period for which it had effect.
39.	Although HMRC had submitted that the case of Westek Ltd v HMRC (SpC629) applied Mr Boddington submitted that as a Special Commissioner case it was persuasive rather than binding.In Westek there was no doubt as to the individuals in the class. In the Appellant’s notice there was no date to indicate for what period it applied and not even the Appellant was named. In Westek the company was named and it stated the applicable dates.
40.	Mr Boddington submitted that the nature of the contract between the Appellant and Bedfordshire Police was for services rather than for the supply of personnel. It was therefore submitted that neither the provisions at Schedule 1 of the NIC Regulations, nor Section 134(1)(b) ICTA 1998, nor Section 44(1)(b) ITEPA 2003 were met.
41.	Mr Boddington submitted that the evidence showed that the individuals were engaged under temporary and ad hoc engagements which they were under no obligation to accept or to be offered, and that Bedfordshire Police was not concerned with who undertook those engagements.
42.	He submitted therefore that the workers were not subject to any obligation to render personal service, and therefore neither the provisions at Schedule 1 of the NIC Regulations, nor Section 134(1)(a) ICTA 1988, nor Section 44(1)(a) ITEPA 2003 were met.
43.	He said that the evidence showed that the individuals were not in practice subject to any supervision, direction or control as to the manner in which their services were rendered; neither was there any evidence that there was any right of such supervision, direction or control.
44.	Insofar as the exclusions provided by Schedule 1 of the NIC Regulations, and at Section 134(5) ICTA 1988 and at Section 47(2) (b)(i) and (b)(ii) ITEPA 2003 were concerned he submitted that the evidence showed that the individuals commonly provided the services at either their own homes or at other premises which were not under the control and management of Bedfordshire Police.
45.	Mr Boddington said that he understood that in relation to those individuals engaged to take witness statements, HMRC’s position was that the premises at which statements were taken were premises prescribed by the nature of the services. This was not the case and so the exclusion should apply.
HMRC’s Submissions
46.	Mr Williams submitted for HMRC that the agency legislation required that the following conditions were met:
(1)	The person contracting with the agency must be an ‘individual’
(2)	The individual renders, or is under an obligation to render, personal service to another person - ‘the client’
(3)	The individual is subject to, or to the right of, supervision, direction or control as to the manner of rendering such service
(4)	The individual is supplied to the client by or through a third person (‘the agency’) and, (for tax purposes) renders those services under the terms of an agency contract between the individual and the agency, or, (for NICs purposes) either
(a)	earnings for such service are paid by or through the agency in accordance with arrangements made with the agency; or 
(b)	payments, other than to the individual, are made by way of fees, commission or a similar nature which relate to the continued employment of the individual
47.	He said that remuneration would not, apart from part 2 Chapter 7 ITEPA 2003, be chargeable as employment income.
48.	 He submitted that it was clear from the legislation that supervision, direction or control need not be exercised in practice but that someone must have the right to do so. This approach was supported by the judgment in Bhadra v Ellam (60TC 466 at 475 to 476). The person having or exercising the right could be the agency, the client or some other person.  The exercise or right of supervision, direction or control must be over the manner in which the services were rendered. Supervision, direction or control over what was to be done, where or when it was to be done was not needed. What was important was whether there was supervision, direction or control over how the work was done.
49.	The evidence had shown that Bedfordshire Police had the right of control over the manner in which the individuals performed their work.
50.	The Appellant’s workers’ contract provided further evidence of a right of control exercisable by the end client. 
51.	HMRC submitted that the contract under which the associates were supplied was therefore an agency contract.
52.	Mr Willaims said that Section 44(1)(a) of ITEPA 2003 required that a worker personally provided or was under an obligation to personally provide services to the client. When a worker was actually undertaking an assignment they were providing their personal service which would be sufficient to satisfy the condition set out in the section.
53.	He submitted that the fact that a worker will provide personal service whilst on a particular assignment to satisfy section 44(1)(a) will not however be sufficient to satisfy the condition set out as section 44(1)(b) ITEPA 2003, unless the worker is required under the terms of the agency contract to provide the services personally. Section 44(1)(b) is satisfied if the services are personally provided by the worker under the terms of an “agency contract”. Section 44(1)(b) needed to be considered in conjunction with section 47(1) which defined an “agency contract” as 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. This requirement was not present in the previous agency legislation for tax, Section 134 of ICTA.
54.	There was no requirement under the NICs provisions, Social Security (Categorisation of Earners) Regulations 1978/1689, Schedule 1, for the worker to be obliged to personally provide the services to the client under the terms of an “agency contract”. For the purposes of NICs, the provisions only require that the worker does in fact render personal service i.e. that personal service is provided when the work was undertaken.
55.	HMRC submitted that the evidence had shown that the individuals were both obliged to and did provide their personal services.
56.	It was common ground that the legislation only applied to individuals and that the remuneration would not, apart from these provisions, be chargeable as employment income.
57.	HMRC submitted that Section 47(2) ITEPA 2003 which referred to the excluded services did not apply. Section 47(2) (b) provided for the exclusion of services rendered wholly in  the worker's own home or at other premises which were neither controlled or managed by the client nor prescribed by the nature of the services. HMRC submitted that the services provided by the individuals were not carried out wholly in the manner described in paragraph (b) and further that where services were carried out outside of the client’s premises this was prescribed by the nature of the services.
58.	Mr Williams argued that the Section 8 Decision was valid. He contended that a class of workers was specified in the decision, as permitted in the legislation and, further, that the decision in Westek Ltd v HMRC (SpC629) was authority for the proposition that copies of the decision do not need to be sent to the workers.
59.	He further contended that notwithstanding the failure to specify the period in the decision, it was clear to the Appellant to which period that decision referred and that, again on the authority of Westek, the decision was not therefore rendered invalid.
Findings
60.	We find that the Section 8 Decision is invalid. It did not comply with Regulation 3 of the Social Security Contributions (Decisions and Appeals) Regulations 1999. As submitted by the Appellant the notice did not contain the name of every person to which it applied or the date or the period from which it was to have effect.
61.	We have examined the case of Westek but find that despite its persuasive value there are a number of differences with the decision issued in that case. In particular in the Appellant’s Section 8 Decision the Appellant’s name is not mentioned, there are no dates and the class of individuals is not specific enough. It was agreed for instance between the parties that workers provided as project managers were not included in the matter but this is not addressed in the Appellant’s Section 8 Decision.
62.	We find that the workers’ contract at Clause 3 gave the Client (in this case Bedfordshire Police) the right to ensure “that the job was completed in accordance with his wishes and in the time stated by him if specified”.
63.	Mr Coombs confirmed that whilst the associates were all experienced retired police officers who needed little supervision he nevertheless believed that Bedfordshire Police retained the right to control or direct the manner in which the work was completed.
64.	Supervision, direction or control need not be exercised in practice but someone must have the right to do so. We found that this approach is supported by the judgment in the Bhadra case.
65.	However there were there were several categories of associates supplied by the Appellant to Bedfordshire Police.
66.	It was agreed between the parties that the project managers were not included in the agency legislation.
67.	In examining the exclusions provided by Schedule 1 of the NIC Regulations, and at Section 134(5) ICTA 1988 and at Section 47(2)(b) (i) and (ii) of ITEPA 2003 we find that those workers supplied as disclosure officers, indexers or exhibit officers were required to carry out their duties “as prescribed by the nature of the services” and so those workers fall into the agency legislation when carrying out these duties.
68.	We find that the SOCOS duties too were prescribed by the nature of the services as they had to attend at the scenes of the crime and so those workers fall within the agency legislation when carrying out these duties.
69.	However we find that all those workers whose project it was to take witness statements fall clearly within the relevant exclusion. These duties were not prescribed by the nature of the services but took place where it was convenient for the witness which could be anywhere at a time selected by the witness.
70.	We find also that those workers whose project allowed for them to work at home would be excluded from the agency legislation when carrying out that project.
Decision
71.	The Section 8 Decision is invalid and if reissued should clearly show the categories of individuals to whom it applies as shown in paragraphs 65 to 68 above, the individuals concerned and the date or period from which it should take effect.
72.	The appeal is allowed in respect of the project managers and the workers who took witness statements or worked at home on projects and dismissed in respect of the disclosure officers, indexers, exhibit officers and SOCOS who  were required to carry out their duties as required by the nature of the services.
73.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

S.M.G. RADFORD

TRIBUNAL JUDGE
RELEASE DATE: 14 March 2011