First-tier Tribunal (Tax)

‘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 have been regarded for the purposes of parts 1 to V of the 1992 Act  as employed in employed earner’s employment by the client.’

‘Intermediary’ is defined in Regulation 5 and it is common ground that ECR is an intermediary for this purpose. ‘Employed earner’s employment’ is defined in section 2 (1) of the 1992 Act to include a person whom is gainfully employed under a contract of service (which is not further defined).The intermediary is treated as making, and the individual as receiving, a payment of deemed employment income calculated in accordance with the rules set out in the legislation in respect of which the intermediary has to account for PAYE and primary and secondary Class1 NIC.

The facts

Miss Richardson has been in business since June 1993 after having been made redundant by her previous employers. She told us that she did not want to risk being made redundant again and decided to become self - employed. As her expertise was in complex computer consultancy, she formed a company to prevent personal liability if she were to be sued. She appears to have had a large number of contracts, some of which have, in the past, run for nearly a year with the same clients. The average period appears to have been about 6 months. Her contract with Jaguar Land Rover, for instance, appears to have run intermittently from 20.8.2008 to 12.6.2010.  ECR has serviced up to 3 separate clients during the period 2002 – 2005; in 2006 and 2007 it serviced 2 separate clients. ECR has specialised computer equipment and an office. It promotes the company’s services through a website ( http:/www.ecr-consulting.

demon.co.uk).The Website contains details of Miss Richardson’s CV.

·       15 March 2004 to 21 May 2004

·       22 May 2004 to 20 August 2004

·       23 August 2004 to 19 November 2004

·       22 November 2004 to 18 February 2005. This contract was extended by correspondence on 3 occasions to cover the following periods:

·       21 February 2005 to 11 March 2005

·       14 March 2005 to 20 March 2005

·       21 March 2005 to 27 March 2005.

Notice of Regulation 80 determination 2002/03  £8907.78

2003/04  £8710.00

2004/05  £9395.00

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Total £27,012.78

She also arranged for the issue of a section 8 decision to recover Class 1 NIC of £24,539.74 for the period 6 April 2002 to 27 march 2005 (of which £7069.51 had already been paid).

The contracts

• Clause 4.3 states that Best will supply a contractor who “will perform to a standard consistent with the requirements specified by VDS, and that the contractor will be replaced within 3 working days if Best has been informed by VDS that the contractor was not satisfactory. It also provided as follows.

“The Consultants who are unable to fulfil their duties to the standard required will be replaced by the Agency if required”…

• 4.6 payment of invoices would be in 30 days
• 4.10 Best is to indemnify VDS against all losses, liabilities, claims, costs and expenses and insure the same up to £2,000,000
• 4.15 VDS could terminate the contract on 4 weeks notice.

The second contract between Best and VDS appears to be Version 2.0 (1/4/2002). Again the contract is unsigned and it is agreed that for the purposes of this appeal the terms are the same as the earlier contract.

·       1 b) The Supplier (ECR) warrants that the Services shall be initially performed by such personnel named in the Schedule (in this case Miss Richardson). The Supplier may propose a replacement to perform the Services in substitution for the named personnel, but any such proposed substitute shall only be accepted if approved in writing by Best and the client.

·       2 c) At the end of the initial engagement Best shall be under no obligation whatsoever to offer further work to the Supplier and the Supplier shall be under no obligation whatsoever to accept any further work, if offered.

·       3 a) provides for indemnity from ECR to Best in similar terms to the VDS contract, and that ECR will indemnify Best against any income tax (whether PAYE or otherwise) or primary National Insurance Contributions…

·       4 b) invoices are to be raised against time sheets

·       5 c) Best are entitled to terminate the contract on 28 days notice or pay ECR in lieu of notice.

(1)        The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master

(2)        He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make the other master

(3)        The provisions of the contract are consistent with its being a contract of service

These conditions are fundamental to the creation of a contract of services and if any one of them cannot be met then the contract is not a contract of service.

Substitution

 Control

“ …if working on large sites where access is limited to normal working hours, the worker is not going to be able to work as and when she or he pleases [and] the limitations put on when the work can be carried out tells us nothing about the status”.

Mr Burke commented that Ready Mixed suggested that:

“ Control includes the power of deciding the thing to be done., the way in which it shall be done, the means employed in doing it, the time when and the place where it shall be done.  It is the right of control not whether it is exercised”.

Mrs Brown explained that she was the Design Team Leader at the time Miss Richardson was engaged to work for VDS and that Mr Holmes was her immediate Line Manager. The design team consisted of between 12 and 14 workers and included VDS employees. The project team moved from their original base in Manchester to its Bolton office.  Miss Richardson was part of the design team that would produce a technical specification that identified the changes required to the IT system. The VDS employees performed the same type of work as Miss Richardson. We accept that Mrs Brown had experience in the implementation of the system and that she was responsible for allocating and prioritising the work for the team.  She told us that VDS operated a Peer Review system for the monitoring and maintenance of standards. We do not accept that these reviews were to ensure that Miss Richardson had dealt with the system correctly, but rather for the whole team to examine how the project was progressing with a view to resolving problems.

26.  During her first contract, when she worked in Bolton, she had rented accommodation, and had had to continue the payments, although VDS had terminated the first contract earlier than was expected. It is unlikely that an employee would have been left with the liability to pay the additional rent. Mrs Brown indicated that all the individual on her team were engaged because of their professional experience and skill. Further, her own annual salary was on the region of £30,000 compared o Miss Richardson’s initial pay which equated to £140,000. There has to be a sufficient degree of control exercisable, consistent with the contract of employment. We have decided that VDS did not have sufficient control.

Financial risk

 Opportunity to profit

“He has the opportunity of profiting from being good at being a vision mixer. According to his reputation so there will be a demand for his services for which he will be able to charge accordingly. The more efficient he is at running the business of providing his services the greater his prospect of profit. “

Miss Richardson did, in fact, perform services for two other clients whilst working for VDS. These involved providing advice as to the most appropriate hardware and software required by the businesses, and the procurement, installation and set up of that equipment for them.

Personal factors

26. Miss Richardson provided the details of the contracts that ECR had had since starting in business in June 1993 referred to in paragraph 6 above. In Hall (H M Inspector of Taxes) v Lorimer [1992] 1 WLR 939 (CA) Mummery J stated:

 “ If a skilled worker works for a number of clients throughout the year  and has a business-like approach to obtaining his engagements ( perhaps involving expenditure  on office accommodation, office equipment, etc) this will point towards self-employment”

Mr Burke pointed out that all of the contracts named Miss Richardson as the operative. He considered that that meant that the contracts were personal to her and that this fulfilled the first of the conditions set out in Ready Mixed. Mr Holmes made it clear in the interview with HMRC on 8 April 2010 that the contractors were used as a budgetary measure and we are satisfied that VDS were not concerned who did the work so long as they were suitably qualified. They appear to have been content to leave the choice of operative to Best/Spring. We cannot therefore accept that the work was personal to Miss Richardson.

27. Miss Richardson told us that she tended to take holidays when she was not working as she needed to provide a specialist service to the clients. She accepted that all the services had to be provided at VDS to tie in with their computer systems and, as the information was sensitive, VDS did not want information either taken off the  site or downloaded on to her equipment at home.

In business on her own account.

28. In Market Investigations Limited v Minister of Social Security [1969] 2 QB Cook J said the test to be applied is;

“Is the person, who has engaged himself to perform those services, performing them as a person in business on his own account? If the answer is Yes then the contract is a contract for services. If the answer to the question is No then the contract is a contract of services.”

ECR is in business on its own account. Miss Richardson produced to the Tribunal copy business cards and company stationary. ECR operates from a dedicated business area at her home. It has company domain and website. ECR advertises its services and is a member of the PCG. It has retained reserves and invested in development and has over the years taken on fixed price work for a variety of clients.

Right of dismissal

29.  By Clause 5 (e) of the Best agreement Best can terminate the contract with ECR if the services are not satisfactory. By (9.3 of the Best/ Spring) agreement Spring can terminate the contract with ECR “forthwith” for lack of performance. This is reflective of a commercial agreement and is an indicator of self-employment. Mr Burke suggested that a typical self-employment contract will come to an end on the completion of the work for which the contractor was engaged, whereas an employment contract usually contains provisions allowing one or other party to give notice of termination. A power to terminate an engagement for reason other than a serious breach of contract is indicative of a contract of employment. Miss Richardson had worked for VDS for a considerable length of time and the proposals in the contracts are at best neutral. We can not accept that terms in the contract are neutral, as VDS did terminate the first contract early, which effectively meant that Miss Richardson was no longer working.

Intention

30. Mr Burke suggested that intention is only relevant as a “tie breaker” in determining status (when indicators are evenly balanced). In the IR35 situation, it is not possible for the parties to have any intention over a hypothetical contract. Lawspeed have pointed out that in Stoddart v Cawder Golf Club [2001] EAT/87300 it was suggested

 “ Where persons intend to create a self-employment situation and the ingredients of such can be found, such as the method of payment, potential exposure to VAT and the lack of consent to be an employee, it is very difficult  for any Tribunal to conclude that the contrary to what the parties had intended to achieve had resulted”.

36. In Express and Echo Publications Limited v Ernest Tanton [1999] EATRF 98/0528/3 Peter Gibson LJ held that as Mr Tanton’s contract had a specific provision to the effect that he could supply a substitute driver, the contract had to be one for services. As a result the case did not pass the irreducible minimum of mutual obligations as set out in Ready Mixed. The right to substitute means that the contract cannot be personal to the contractor. The agreements between Best/ Spring and VDS make provision for a substitute. The reality of the case is that VDS would have requested that Best/Spring should find a replacement for Miss Richardson, if the occasion arose. The substitution clause is still affective even if the consent of VDS is required. If Mr Burke is right and the clause is fettered it is still a clause which would not appear in a contract of services, but in a contract for services.

 37. ECR was engaged for the performance of a specific project. There has never been any other obligation on Best/Spring or VDS to offer work to ECR or on ECR to accept such work. What occurred was the impact of market forces typical of the freelance contracting market place. It is a situation and a relationship that is typical of self-employment and atypical of an employer/employee relationship.

38.  Clause 1(g) in the agreement between ECR and Best provided that ECR ‘shall be expected to exercise a degree of control as to the method of the performance of the services’. It also provided that the contractor would use reasonable endeavours to see that VDS standards and methods were complied with. Mrs Brown exercised no real control over the way Miss Richardson carried out the contract. There appears to have been no employee policies, procedures or guidance available for any of the contractors. Miss Richardson was able to decline to work for VDS after the early termination of the first contract and was always free to do the same at any time. These rights are not normally found in a contract of services.

39.  There was no provision in the agreements for holiday entitlement, holiday pay, sick pay, the provision of a vehicle, or a contribution to a pension fund. Most of these provisions would appear in a contract of service. Further the case of  Lime-it Ltd v Justin (office of the Board of Inland Revenue)[2003] STC (SCD)15 and Tilbury Consulting Ltd v Margaret Gittins ( H M Inspector of Taxes) [2003] SPC 3020 are similar to this appeal as they dealt with contractors in the computer industry and found that the contracts were contracts for services. In the circumstances the assessment should be dismissed and the appeal allowed

The decision

a.      Unlike many of the case we have been referred to, this case has two agencies- Best/Spring and ECR. Miss Richardson was not a party to the contract between VDS and Best/Spring. As submitted by Mr Boddington, we accept that, where the parties have entered into formal contracts, the terms of those contracts have to be imported into the hypothetical agreement between Miss Richardson and VDS.

b.     The HMRC interview of 8 April 2010 clear shows that VDS used their contractors on the basis that they could obtain the best advice at the most reasonable price. VDS appear to have relied on Best/Spring to provide the contractors. It appears that it was immaterial who was appointed, so long as that person had the necessary skills. We do not accept that in reality the substitution clause was in any way fettered as suggested by Mr Burke. On that basis we are satisfied that the hypothetical contract would have to have a valid substitution clause, which could only be found in a contract for services.

c.       VDS were prepared to negotiate the best price at the time, which in this case, was £600 for the first contract and almost half that amount for the second contract. The hypothetical contract would have to have a clause, which gave VDS the opportunity to fix the remuneration to be paid on their terms. It would not be possible to control an employees pay in that manner and a contract of service would make no such provision.

d.     Whilst we accept that Mrs Brown represented VDS with regard to the management, we do not accept that she had any real control over the way in which Miss Richardson worked. It is unusual that VDS were content to accept invoices showing the work for the week as being 37.5 hours when it is clear from Miss Richardson’s internal records that the hours she worked varied from week to week. That is consistent with a contract at an agreed price, which leaves the contractor to deliver the same as best he or she might. A contract of services would specify a 37.5 hours working week and would make no provision for the employee to provide variable cover without consent.

e.      The termination provisions made it clear that there was no obligation on either party to employ the other or work for the other. This was demonstrated when Miss Richardson refused initially to work for VDS, also when VDS subsequently terminated the first contract prematurely. The hypothetical contract would have to make provision for this. This is not a provision that would be found in a contract of services.

f.       In ‘painting the picture’ it is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation. The terms of the hypothetical contract would result in a contract for services.

The findings of fact and the application of the statutory assumptions to those findings do not support the decisions appealed against. We therefore allow the appeal. We make no order for costs as none have been requested.

TRIBUNAL JUDGE

RELEASE DATE: 11 May 2011