SPC00496
CONSTRUCTION INDUSTRY SCHEME – whether the Appellant’s business “consists of or includes the…the furnishing or arranging for the furnishing of labour in carrying out construction operations” (s 566(2) Taxes Act 1988) – yes
Whether failure to inspect registration certificates was minor and technical (s 565(4)) – no 

THE SPECIAL COMMISSIONERS

	HUDSON CONTRACT SERVICES LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 17 and 18 August 2005

Jolyon Maugham, counsel, instructed by Lloyd Dowson, chartered accountants, for the Appellant

Akash Nawbatt, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal by Hudson Contract Services Limited against the refusal on 25 May 2005 to renew its construction industry certificate.  As the certificate expired on 31 August 2005 an expedited hearing was arranged (the appeal was transferred from the General Commissioners only on 8 July 2005) and I agreed to give a decision as soon as possible after the hearing.  The Appellant was represented by Mr Jolyon Maugham, and the Respondents, to which I shall refer as the Revenue, was represented by Mr Akash Nawbatt.
2.	The issues in this appeal in outline are first, whether the Appellant’s business “consists of or includes the…the furnishing or arranging for the furnishing of labour in carrying out construction operations” (s 566(2) Taxes Act 1988), it being common ground that the Appellant satisfies all the other conditions of the construction industry scheme relating to its business. Secondly, whether any breach of Regulation 7F of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 (SI 743/93) was “minor and technical” within the meaning of section 565(4) and does not give rise to doubt future compliance.
3.	I heard evidence from Mr David Jackson, director of the Appellant and, with his wife, the holder of all the shares; Mr Glyn Simpson, director of DNC Scaffolding Limited, a client of the Appellant; and a witness statement of Mr Rob Parkin, self-employed subcontractor working for DNC Scaffolding Limited was admitted.  There was a bundle of documents.  Both counsel provided skeleton arguments in advance and both made further written submissions.  I am grateful to them for their cooperation in bringing on the appeal quickly and identifying the issues in dispute.
4.	There was an agreed statement of fact as follows:
The Appellant
(1)	Hudson Contract Services began life as a partnership in May 1996. The Appellant company, Hudson Contract Services Limited, was formed on 21st March 1997 and acquired and continued with the partnership trade as from April 1997.
(2)	At all material times:
(a)	the Appellant carries on business in the United Kingdom;
(b)	that business is, to a substantial extent, carried on by means of an account with a bank;
(c)	that business is carried on with proper records having regard to the obligations specified in s 562(8)-(12) of the Taxes Act 1988;
(d)	that business is carried on from proper premises and with proper equipment stock and other facilities; 
(e)	the Appellant has complied with the obligations imposed on it by the provisions of the Companies Act 1985 stipulated in s 565(6) of the Taxes Act 1988 in so far as they fell to be complied with at material times; and
(f)	there is reason to expect that the Appellant will continue to comply with all such obligations mentioned in paragraphs (a) to (e) of this paragraph. 
(3)	The Board has at no time given a direction under section 561(6) which is referable to the Appellant.   
(4)	Substantially the entirety of the Appellant’s Clients operate as building contractors. They operate, variously, as general builders, civil engineers, roofers, scaffolders, plant hirers, joinery contractors, house builders, tunnelling contractors, surfacing contractors and otherwise as building contractors.  Substantially the majority of those Clients have entered into a contract with the Appellant the form of which is substantially the same as the Appellant-Client contract.
(5)	The Appellant enters into written contracts with the Client and Operatives.  There is no written contract entered into between the Client and the Operative.
(6)	Operatives will approach the Clients directly. Any negotiation about the amount of payment, the nature of work to be undertaken and the timescale for completing that work will be negotiated between the Operative and the Client.  The Appellant has no involvement in these arrangements or negotiations. Once completed and signed, the Client will send the standard form contract to the Appellant.  
(7)	The Appellant does not introduce the Operatives to their Clients nor does it have a pool or database of operatives.  
(8)	The Appellant does not warrant the suitability of the operative and is not responsible for remedying any defects in the operatives’ performance.
(9)	The Appellant has held a certificate issued under s 561 of the Taxes act 1988 by the statutory predecessor to the Respondents for substantially the entirety of the period since it was incorporated.
(10)	On 25 February 2002, the General Commissioners found that an oral contract was formed between the Client and the operative before any involvement of the Appellant and that the Appellant did not supply the workers to the Client.
(11)	Shortly after the decision of the General Commissioners, the Appellant modified the terms of its standard form contracts and required that all existing and new Clients and Operatives sign those new contracts.  
The application
(12)	The Appellant applied for a renewal of its certificate on 16 February 2005. By letter of 25 May 2005, that application was refused. By letter of 13 June 2005, the Appellant appealed against that refusal. By letter of 8 July 2005, the appeal was transferred to the Special Commissioners. 
Agreed issues of law
(13)	The central issue that arises for determination is whether s 562(2) is satisfied and, in particular, whether the Appellant’s business “consists of or includes the …the furnishing or arranging for the furnishing of labour in carrying out construction operations.”
(14)	Both sides agree that the burden of proof is on the Appellant to satisfy the Commissioners that its business satisfies the requirements of s 562(2).
(15)	The only other issue is whether any breach of Regulation 7F of SI 743/93 is “minor and technical” within the meaning of section 565(4) and does not give rise to doubt future compliance.
(16)	It is agreed that the Special Commissioners’ jurisdiction in relation to these three issues is to decide the questions before it de novo on the evidence before it and that its jurisdiction is not merely supervisory.
The furnishing or arranging for the furnishing of labour
5.	Mr Maugham for the Appellant contends in relation to the central issue, briefly, as follows:
(1)	The Operatives have contracted with the Appellant to provide their labour to the Clients.
(2)	Most, if not all, of the Clients carry out “construction operations” as defined by s 567 for the purposes of Part XIII Chapter IV of  the Taxes Act 1988.
(3)	The Operatives do carry out work for the Clients but do not have any direct contractual relationship with them.
(4)	In the generality the carrying out of work for the Clients by the Operatives is made conditional by the Clients on the Operatives signing a contract with the Appellant.
(5)	It is the Appellant’s business inter alia to carry on the activity of contracting with the Operatives further to which contracts the Operatives furnish their labour to the Clients.
(6)	In the premises, the Appellant’s business “includes the furnishing... of labour in carrying out construction operations.”
(7)	Alternatively, if, contrary to its primary submission at (3) above, the Operatives do have a contractual relationship with the Clients nevertheless in all the circumstances the Appellant’s business “includes the furnishing or arranging for the furnishing of labour in carrying out construction operations.”
6.	Mr Nawbatt, for the Revenue, contends:
(1)	It is accepted that in the tri-partite relationship between the Appellant, the Client and the Operative labour is being furnished to the Client pursuant to a contract.  The General Commissioners found that that the labour was being furnished pursuant to an express oral contract between the Client and the Operative.  The question is whether under the “new” arrangements the operatives are now being furnished under the contracts between the Appellant and the Operative and the Appellant and the Client, ie that the old payroll contracts are now contracts to furnish the Operative to the Client.
(2)	The Revenue do not accept the Appellant’s contention that the “new” contractual arrangements between the parties changes the relationship between the Client and the Operative so that there is no longer a direct contractual relationship between those parties.  
(3)	Both under and the old and new Appellant–Operative contract the Appellant could not and cannot be said to be furnishing or arranging for the furnishing of labour to the Appellant’s Clients in circumstances where:
(a)	the Appellant does not introduce the Operative to the Client;
(b)	the terms and conditions of the particular engagement (ie the rate of pay and the length and requirements of the engagement) are negotiated and concluded directly between the Client and the Operative; 
(c)	the Appellant is only notified of the fact of the engagement after agreement has been reached between the Client and the Operative; and
(d)	other than arranging for the payment of the Operative, the Appellant has no material contact with the Operative either before or after the Operative commences the engagement. 
7.	It will be seen from the above that there is a substantial measure of agreement between the parties and I can concentrate of the issue between them.  As a result of the evidence and from the documents I find the following further facts:
(1)	Before 1997 Mr Jackson carried on a traditional agency.  Since then he changed to being a contractor of hired-in labour.  The basic features and intention of the business has remained consistent since 1997.  There has been an Appellant-Operative contract and an Appellant-Client agreement the form of which has changed, the latest revision being in use from about June 2002 following the General Commissioners’ case, in which they found that there was an oral contract between the Client and the Operatives.  The Employment Tribunal also found that the Appellant provided a payroll facility in Sheldon v Hudson Contract Services Ltd and Hewlett Civil Engineering Ltd (Case No.2801174/04) in October 2004, which is after the revision of the contracts following the General Commissioners’ case.
(2)	The Appellant advertises its services to construction industry contractors by direct marketing as a business that facilitates self-employment status.  In outline the Appellant’s objective is that instead of the Client engaging the Operative as a labour-only subcontractor as would normally happen, the Appellant is interposed between them so that the Client contracts with the Appellant and the Appellant contracts with the Operatives for which the Appellant charges £15 per week per Operative.  At present it has about 112 Clients who engage about 1,300 Operatives through the Appellant.  There is no difference in the tax result but the effect is that the Client is relieved from the administrative and legal burden of dealing with status enquiries and returns to the Revenue.
(3)	A new Client will be sent a welcome pack consisting of a supply of contracts with Operatives, introduction letters to give to the Operatives, a sheet setting out the engagement process, software for submitting payment data.  
(4)	The introduction letters to Operatives states: “We have been appointed to contract and pay labour-only sub-contractors, as a ‘third-party’ business service.”  It states that “We are paid a fee by our clients, the construction company, for providing contract, audit & payroll services.  The contract for your services is with us, not our client the construction company.”
(5)	The engagement process sheet states “At the point when work is offered, the Operative should be made completely aware of who Hudson are, what we do, how we operate and what our responsibilities are, before the work is accepted & commenced.”  It also states “The Operative should fill out and sign an original Hudson Contract completely, and supply a copy of his CIS card.  The contract must record details of pay negotiations with the Operate, before work is commenced.”  Both of these happen in practice.
(6)	The contract between the Appellant and the Client includes the following terms (with obvious errors corrected) 
“1.  The following are the terms and conditions pursuant to which [the Appellant] undertakes to contract with an individual (‘the Operative’) the labour of whom the Client shall require for use in the course of its business.
2.  The services to be provided by [the Appellant] are that of acting as an engager of such workers (‘the Operatives’ or individually, ‘Operative’) as the Client may wish pursuant to either of the documents stated in clause 3 following.
3.  If the Client wishes to engage [the Appellant’s] services under clause 1 above, the Client shall further either to:…
(ii) clause 3 of the document entitled ‘Contract for the future provision of services (self-employed) to [the Appellant] which is attached hereto (‘the Self-Employed Contract’);
notify [the Appellant] of the rate of pay agreed between the Client and the Operative.  That notification shall take place on a form that [the Appellant] shall supply to the Client.
4.  The negotiation of remuneration is for the Client and the Operative.  For the avoidance of doubt, the Client may agree remuneration that is not dependant on time input such as measured rates, lump sums for tasks completed, fixed time sums per job as well as hourly remuneration.
5.  The Client undertakes to, in respect of each Operative notified to [the Appellant] explain to the Operative that he will not contract directly with the Client but will contract with [the Appellant].
…
14.The Client hereby undertakes to indemnify [the Appellant] against the cost of complying with payroll transactions undertaken by [the Appellant] inclusive of fee charges and VAT stated in accordance with payment instructions sent to [the Appellant] by the Client and referred to in clause 7.  This obligation excludes any subsequent tax or tribunal status rulings provided that the Client rigidly applies [the Appellant’s] current Terms of Business conditions and Operative contract.”
(7)	The contract between the Appellant and the Operative has space for filling in the following details: company hiring, site address, person to report to, start date, type of work, pay basis.  It includes the following terms:
1.  This contract sets out the terms pursuant to which you (the ‘Operative’) will provide your labour (the ‘Contract Work’) to [the Appellant’s] clients (the ‘Client’) operating in the construction sector.
…
3.  The terms upon which the Contract Work is to be effected by the Operative shall be negotiated directly between the Operative and the client.  Upon the conclusion of these negotiations, the client will notify [the Appellant] in writing as to the rate of pay agreed between the Client and the Operative.
4.  Upon receipt of that notification, [the Appellant] will step into the shoes of the client and will contract with the Operative upon the terms negotiated between the Client and the Operative.  However, [the Appellant] and the Operative also agree to be bound by the additional obligations placed upon them by this Contract
5.  The Operative hereby acknowledges that his contract is with [the Appellant] and that, in respect of any engagement notified to [the Appellant] by the Client, the Operative has no contract with the Client…
6.  The Operative hereby agrees:…(v) to be bound to [the Appellant] to satisfy each and every obligation which he has negotiated with the client….
7.  [The Appellant] hereby agrees:…(iii) to abide by such other obligations [that is, other than making payments] as the Client my explicitly accept in negotiations as between the worker and the Client….”
(8)	Mr Simpson of DNC Scaffolding Limited, who has used the Appellant’s services since 1997, said (and I accept) that before any work arrangements are made the scaffolder is told that he must complete and sign the contract with the Appellant and he explains that his contract is with the Appellant rather than DNC.  Scaffolders coming to DNC today are told that they will not be given any work unless they sign the contract with the Appellant.  Scaffolders may not fully understand the arrangement with the Appellant but at the end of the day the Operative’s real concern is to be paid for his work and he does not really mind with whom his contract is. Scaffolders who were working before the General Commissioners’ case probably do not realise that anything has changed; they are happy to sign whatever contracts are required by the Appellant, as Mr Parkin confirmed was the case for himself.  Mr Simpson considers that the protection offered by the Appellant over such matters, as tax, employment law and the Working Time Directive, which are a real worry for companies in the construction industry, is good value for money.  I infer that all these points are the same for other Clients.
(9)	The Appellant-Client contract is different in many respects from a normal agency contract.  In particular, the Appellant has little contract with the Operatives apart from a few telephone calls; is not provided in advance with information about the type or numbers of Operatives required by the Client; is under no obligation to find labour for the Client; is under no obligation to provide a substitute Operative for one who does not turn up (but the Operative is in breach of contract with the Appellant and the Appellant is in breach of contract with the Client); is under no obligation in advance to provide the Operative with work, but once the Appellant-Operative contract is entered into is obliged to provide the Appellant with the work specified in that contract; has no control over the commencement or termination of its contract with the Operative; has no control over the level of remuneration; is informed of the fact of the contract and the rate of pay after these are negotiated (and those terms become binding on the Appellant on receipt of written notification); is not informed of all the terms agreed between the Client and the Operative, for example, the time-scale for completion of the job, the detailed nature of the work, what equipment each will provide, whether the Operative may send a substitute, and what level of supervision the Operative will be subject to; will be unaware of any variations, except in relation to pay, agreed between the Operative and the Client.
8.	However strange the written contract between the Appellant and the Operative and between the Appellant and the Client may be, I find that they are valid and enforceable contracts binding the parties to what they have agreed to do, whether or not the Appellant is aware at the time of all the terms negotiated between the Client and the Operative.  I consider that the expression in the Appellant-Operative contract that the Appellant steps into the shoes of the Client in accepting contractually everything that the client and the Operative have negotiated expressly non-contractually, is a good description of what is happening.  While the Appellant may be unaware of all the terms negotiated between the Client and the Operative this does not mean that they are not binding on the Appellant.  One may doubt that anyone would wish to enter into such contracts if the construction industry scheme did not exist but this is not avoidance of the scheme; it is the Appellant being paid for taking responsibilities under the scheme that would otherwise fall on the Client.  The written contracts say the following about the contracting parties: under the Appellant-Client contract the Appellant supplies the Operative’s labour to the Client and requires the Client to explain to the Operative that his contract is with the Appellant and not with the Client, which the client does explain; the Appellant-Operative contract provides for the Operative to supply labour to [the Appellant] and it states that the contract is not with the Client.  The parties have agreed labour is being furnished to the Client pursuant to a contract.  On the basis solely of the written contractual position the only possible contract for the furnishing of labour is the Appellant-Client contract.  I turn to examine Mr Nawbatt’s contentions why this is not the case which are summarised in paragraph 6.
9.	First, Mr Nawbatt starts with the General Commissioners’ finding, in proceedings relating to the agency provisions where the sub-contractors provisions were not in the minds of the parties, that there was an express oral contract between the Client and the Operatives.  One of the issues then was whether the Operatives were supplied by or through the Appellant.  Mr Maugham who appeared for the Appellant before the General Commissioners contended that the Operatives contracted directly with the Client and did not contract with the Appellant; and that the Appellant did not make up a deficiency or fulfilled a want or demand on the part of the Clients.  The General Commissioners in an impressive decision found that an oral contract was formed between the Client and the Operative before any involvement of the Appellant and as a consequence there cannot be said to have been any supply of the Operative to the Client.  Effectively they decided that the Appellant was providing a payroll service.
10.	Since then the contracts have changed and so has the practice that the Operative is told by the Client that his contract is with the Appellant, but Mr Nawbatt contends that the reality has not changed.  The contract the Appellant enters into is a strange one in view of the facts found in paragraph 7(9).  The Client and the Operative negotiate terms, which are expressly not a contract between them on the basis that the Appellant will be bound by those terms upon receipt of notification of the terms.  The Appellant has, in the words of the Appellant-Operative contract, stepped into the shoes of the Client and accepted whatever terms the Client has negotiated with the Operative without knowing about all of them. 
11.	I am doubtful about adopting the approach that nothing has changed in reality since the General Commissioners’ decision and I should therefore follow it, although this was the approach of the Employment Appeal Tribunal in Catamaran Cruisers v Williams [1994] IRLR 386 in which an employee interposed his own company between himself and his former employer and the tribunal found that there was no factual change.  It implies that I need to adopt their construction of different contracts in the light of the then practice and use that as the starting point to my construction of the present contracts in the light of the current practice.  What I consider that I should do is to decide the issue of who contracted with whom on the basis of the facts as they are found to be today, but, having done that, I accept that I should then look critically at the conclusion if it is different from that found by the General Commissioners and also by the Employment Tribunal in the Sheldon case, when it was not in the Appellant’s interests to argue the point that it argued before me, and also when there is much similarity between the situation then and now.
12.	The issue is whether there is an express oral contract between the Client and the Operative.  Clearly they negotiate the terms fact to face but with the background that (1) the Client has agreed with the Appellant that it will explain to the Operative that he will not contract directly with the Client but will contract with the Appellant, and I have found that the Client does so; (2) the Operative has been given a letter from the Appellant stating that “the contract for your services is with us, not our Client”; and (3) the Operative signs a contract with the Appellant stating that “The Operative hereby acknowledges that his contract is with [the Appellant] and that, in respect of any engagement notified to [the Appellant] by the Client, the Operative has no contract with the Client.”  Given all these factors it is impossible for me to find that there is an express oral contract between the Client and the Operative.  Testing that conclusion against that of the General Commissioners, while I can easily accept that all the Operative cares about is that he is paid for his labour and has little or no interest in who pays him or engages him, nevertheless the contractual position and the practice is now sufficiently different from what it was before the General Commissioners I consider that I am fully justified in coming to a different conclusion from them.  Even if the contracts are the same as they were in the Sheldon case (which I am not sure is the case), on the evidence before me I would not come to the same conclusion that the Appellant provided only a payroll facility.
13.	Mr Nawbatt’s alternative contention is that there is an implied contract between the Client and the Operative.  He relies on the approach of the Court of Appeal in Dacas v Brook Street Bureau [2004] IRLC 358, as applied by the Employment Appeal Tribunal in Muscat v Cable and Wireless 25 February 2005 (unreported) (UKEAT/0661/04/LA).  Dacas concerned a cleaner, Mrs Dacas, engaged by an employment agency, Brook Street Bureau (“Brook Street”), which had a contract with Wandsworth Borough Council (“Wandsworth”) for the provision of agency staff.  Mrs Dacas worked for Wandsworth exclusively in one place from 1995 or 1996 until she was dismissed in April 2001.  Her contract with Brook Street did not guarantee any work but envisaged that she would be found temporary work.  It expressly provided that there was no contract of employment between Brook Street and her, or between her and the client.  On her dismissal she claimed unfair dismissal against Brook Street and Wansworth to which she would be entitled if she had a contract of employment.  The Employment Tribunal found that she had a contract with Brook Street that was not a contract of employment, and no contract with Wandsworth.  The Employment Appeal Tribunal found that the contract with Brook Street was an employment contract.  The Court of Appeal found that the contract with Brook Street was not an employment contract since there was no obligation on Brood Street to provide any work and she was not obliged to accept any work found by them.  As there was no appeal against the tribunal’s decision in favour of Wandsworth, the Court of Appeal could not find that there was an implied employment contract with Wandsworth but they made it clear that in future cases the tribunal should consider whether there was.  Sedley J stated that he doubted whether on the facts found there was any answer other than there was such an implied contract with the client. Mummery LJ gave this general guidance about implied contracts:
“16. The statutory definition of a contract of employment as a ‘contract of service’ expressly includes an ‘implied’ contract. This should not be overlooked. I think that it has been.  Like other simple contracts, a contract of service does not have to be in any particular form. Depending on the evidence in the case, a contract of service may be implied—that is, deduced—as a necessary inference from the conduct of the parties and from the circumstances surrounding the parties and the work done. As already indicated, the overall situation under consideration is shaped by the triangular format used for the organisation of the work: the applicant, the employment agency and the end-user are all involved. Each participant in the triangular situation may have an express contract with either one of, or with each of, the other two parties.
17. The critical point is that, although the construction of the contractual documents is important, it is not necessarily determinative of the contract of service questions, as   contractual documents do not always cover all the contractual territory or exhaust all the contractual possibilities. In determining the true nature of the relationship (if any) between each of the respective parties, it is necessary to consider the total situation occupied by the parties. The totality of the triangular arrangements may lead to the necessary inference of a contract between such parties, when they have not actually entered into an express contract, either written or oral, with one another. Although there was no express contract between the applicant and the end-user in this case, that absence does not preclude the implication of a contract between them. That depends on the evidence, which includes, but may not be confined to, the contractual documents.
18. As a matter of law, when an issue is raised about the status of the applicant in unfair dismissal proceedings, an implied contract between parties who have no express contract with one another is a possibility that should be considered by the Employment Tribunal in making its findings of fact. It is relevant to the decision whether the applicant works under a contract, and, if so, what kind of contract it is and with whom it was made. There may be no contract of any kind, because it is found that there is no mutuality of obligations. There may be an implied contract, which may be characterised as a contract of service or as a contract for services. There may be an implied contract of some as yet unclassified kind, wedged within the traditional dichotomy, such as a ‘semi-dependent worker’s contract,’ as mentioned by Professor Freedland in his book, or a quasi-dependent worker’s contract, as mentioned in the work of Professors Deakin and Morris on Labour Law (2001) at p.1688. 
19. If the applicant has a contract of service in a triangular situation of this kind, it may be with (a) the end-user, the contract usually being an implied one, or (b) the employment agency, depending on the construction of the express contract between the applicant and the agency and on other admissible evidence or, though this is more problematical, (c) more than one entity exercising the functions of an employer, namely the employment agency and the end-user jointly (see Freedland at pp. 42-43).
…
52. This means that, in ascertaining the overall legal effect of the triangular arrangements on the status of Mrs Dacas, the Employment Tribunal should not focus so intently on the express terms of the written contracts entered into by Brook Street with Mrs Dacas and the Council that it is deflected from considering finding facts relevant to a possible implied contract of service between Mrs Dacas and the Council in respect of the work actually done by her exclusively for the Council at its premises and under its control, until it took the initiative in terminating that arrangement. The formal written contracts between Mrs Dacas and Brook Street and between Brook Street and the Council relating to the work to be done by her for the Council may not tell the whole of the story about the legal relationships affecting the work situation. They do not, as a matter of law, necessarily preclude the implication of a contract of service between Mrs Dacas and the Council. There may be evidence of a pattern of regular mutual contact of a transactional character between Mrs Dacas and the Council, from which a contract of service may be implied by the tribunal. I see no insuperable objection in law to a combination of transactions in the triangular arrangements, embracing an express contract for services between Mrs Dacas and Brook Street, an express contract between Brook Street and the Council and an implied contract of service between Mrs Dacas and the Council, with Brook Street acting in certain agreed respects as an agent for Mrs Dacas and as an agent for the Council under the terms of the express written agreements.
53. I approach the question posed by this kind of case on the basis that the outcome, which would accord with practical reality and common sense, would be that, if it is legally and factually permissible to do so, the applicant has a contract, which is not a contract of service, with the employment agency, and that the applicant works under an implied contract, which is a contract of service, with the end-user and is therefore an employee of the end-user with a right not to be unfairly dismissed. The objective fact and degree of control over the work done by Mrs Dacas at West Drive over the years is crucial. The Council in fact exercised the relevant control over her work and over her. As for mutuality of obligation, (a) the Council was under an obligation to pay for the work that she did for it and she received payment in respect of such work from Brook Street, and (b) Mrs Dacas, while at West Drive, was under an obligation to do what she was told and to attend punctually at stated times. As for dismissal, it was the Council which was entitled to take and in fact took the initiative in bringing to an end  work done by her at West Drive. But for the Council's action she would have continued to work there as previously. It is true that the obligations and the power to dismiss were not contained in an express contract between Mrs Dacas and the Council. The fact that the obligations were contained in express contracts made between Mrs Dacas and Brook Street and between Brook Street and the Council does not prevent them from being read across the triangular arrangements into an implied contract and taking effect as implied mutual obligations as between Mrs Dacas and the Council.”
14.	I understand that this decision upset the expectations of the industry, and in Mucat it was contended that it was decided per incuriam but was followed in that case, which I understand is under appeal.  The Employment Appeal Tribunal accepted in Mucat that there were powerful arguments against Dacas in which relevant authorities were not cited, but they considered that the tribunal had been correct to follow it.  I understand that Muscat is under appeal.
15.	Mr Nawbatt contends that here an implied contract reflects the commercial reality, which is that the Appellant is merely supplying a payroll facility.  Indeed he contends that the position here is stronger than in Dacas because the terms are negotiated directly between the Client and the Operative without the involvement of the Appellant.  Effectively he contends that the situation is the same as it was at the time of the General Commissioners’ decision that there was then an express oral contract between the Client and the Operative, except that now there is an implied contract.
16.	Mr Maugham contends that the decision was influenced by policy considerations concerning employment rights that have no application here; outside that policy area a contract is implied only where it is necessary (see The Aramis [1989] 1 Lloyd’s Rep 213, and Baird Textiles Holdings Ltd v Marks and Spencer plc [2001] ECWA 274); that it makes the agency provisions in tax legislation in Part 2 of Chapter 7 of ITEPA 2003 and the Social Security (Categorisation of Earners) Regulations 1978 otiose (to which Mr Nawbatt replies that they are not otiose but they do not apply where there in an implied contract); that the same considerations apply to an employing company within a group of companies; here there is an express assertion between the Client and the Operative that there is no contract between them.  Even if there is an implied contract it must come into being by conduct which must be after the labour has been furnished by the Appellant to the client under the written contract; the labour was supplied partly under the Appellant-Client contract; or the Appellant’s business still includes arranging for labour to be furnished.
17.	This appeal concerns the same general area of law as Dacas and it is clearly relevant.  In my view, however, the facts here are significantly different from those in Dacas in which the only contract negativing the existence of an implied contract with Wandsworth was in the contract between Mrs Dacas and Brook Street.  Here all parties have negatived the existence of a contract between the Client and the Operative: the Appellant-Client contract requires the Client to explain to the Operative that his contract is with the Appellant and not with the Client, which I have found the Client does explain; and the Appellant-Operative contract states that the contract is not with the Client.  To find that an implied contract existed between the Client and the Operative would go against the express terms of contracts that they have both entered into and statements between the Client and the Operatives, which is going further than upsetting what was merely the unexpressed expectations of Wandsworth that by entering into a contract with Brook Street they would not be entering into a contract with Mrs Dacre, and the express term of the contract between Mrs Dacas and Brook Street to which Wandsworth was not a party.  Mr Nawbatt pointed out the parties cannot change the substance of the relationship between them by labels, but I do not consider that this is an apt description of what the parties have done.  Acting in accordance with the principles in Dacas that I am not limited to the contractual documents and should take into account the total situation between all the parties viewing these with practical reality and common sense, I find that there was no such implied contract.  I also agree with Mr Maugham contention that even if I am wrong about this and there is an implied contract it must be made by conduct taking place after the work starts, which is necessarily after the labour has been provided pursuant to the Appellant-Client contract.  Since I am concerned with the contract under which the labour is provided, any implied contract arising later must be irrelevant to the question I have to decide.  There seem to be other tax implications following from Dacas which fortunately do not arise in this appeal.
18.	Having found that there is no express or implied contract between the Client and the Operatives I return to consider whether the Appellant’s business “consists of or includes…the furnishing or arranging for the furnishing of labour in carrying out construction operations” (s 566(2) of the Taxes Act 1988).  It is common ground that to furnish is to supply or to provide.  In a normal agency situation, labour will be introduced but I do not think that this is necessary.  In spite of the facts found that the Appellant’s obligations are quite different from that of a normal agency in that they do not have an pool of Operatives, the contract between the Appellant and the Operatives is a genuine, although perhaps a strange, one under which the obligations of each party are enforceable.  It is the only contract under which labour contracted to the Appellant is received by the client.  In the circumstances I find that the labour was supplied, and therefore furnished, by the Appellant and accordingly its business consists of or includes such furnishing of labour.
Minor and technical
19.	This point was first raised about two weeks before the hearing.  Mr Nawbatt told me that it was raised as a result of receiving Mr Jackson’s witness statement.
20.	Section 565 provides:
“(3) The company must, subject to subsection (4) below, have complied with all obligations imposed on it by or under the Tax Acts or the Management Act in respect of periods ending within the qualifying period and with all requests to supply to an inspector accounts of, or other information about, the business of the company in respect of periods so ending. 
 (4) A company which has failed to comply with such an obligation or request as is referred to in subsection (3) above shall nevertheless be treated as satisfying this condition as regards that obligation or request if the Board are of the opinion that the failure is minor and technical and does not give reason to doubt that the conditions mentioned in subsection (8) below will be satisfied.
…
(8) There must be reason to expect that the company will, in respect of periods ending after the end of the qualifying period, comply with all such obligations as are referred to in subsections (2) to (7) above and with such requests as are referred to in subsection (3) above.”
Regulation 7F of the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1993 provides
“(1) Before making any payment to which section 559 applies to a sub-contractor, and unless the circumstances specified in paragraph (3) apply, a contractor shall— 
(a) ensure that the sub-contractor’s registration card is produced to him, and 
(b) satisfy himself by inspection of the registration card that the person producing it is the user of that registration card. 
(2) For the purposes of paragraph (1), the user of the registration card shall, whenever required to do so, produce the registration card for inspection by the contractor or the contractor’s authorised representative. 
 (3) The circumstances specified in this paragraph are that the contractor— 
(a) has previously caused the sub-contractor’s registration card to be produced to him, and 
(b) thereby satisfied himself as mentioned in paragraph 1(b), and 
(c) has no reason to doubt that the person who produced it remains the user of that registration card.”
21.	As a result of the Revenue’s raising this contention Mr Jackson put in a supplementary witness statement.  He says (and I accept) that he takes his tax obligations seriously and is not aware of any other failings while making about 30,000 payments to 1,300 Operatives in a year.  (The Revenue put in a paper without notice claiming some late filing of vouchers, which are accepted as being minor and technical, and so I ignore these.)  In relation to registration cards the Clients will photocopy these and send them to the Appellant; they never come from the Operatives.  He was not aware of the obligation in Regulation 7F.  The Revenue has known about the Appellant’s procedures over the last 8 years.  In particular, a meting was held prior to the General Commissioners’ hearing where the procedure was discussed; it was implicit in his evidence to the General Commissioners that he rarely meets the Operatives; and he sent the Revenue on 11 November 2002 copies of the new contracts with the Operatives with an addendum requiring a copy of the Operatives’ registration card next to the signature box.  For the future he proposed that the Appellant appoints the Clients its authorised agent for the purposes of inspecting the cards and satisfying itself that the person producing the card is the holder of the card (and is willing to discuss alternatives if that would not satisfy the Revenue).
22.	Mr Maugham contends:
(1)	Because of the late raising of the issue the Revenue has not given the Appellant the opportunity of explaining or providing extenuating circumstances.
(2)	This is a failure to observe only one requirement which qualatively is a minor one.  That failure does not go to the tax reliability of the business.  It has gone some way to complying with the obligation by obtaining and retaining the copies of the registration cards.
(3)	The failure is a technical one as the Client sees the original registration cards.
(4)	Culpability is relevant.  The only reason for the default is its ignorance of the requirement.
(5)	The Revenue has renewed the Appellant’s certificate since knowing about its procedures from the General Commissioners’ hearing.
(6)	The problem will not recur in the future.
23.	Mr Nawbatt contends that: 
(1)	The requirement to see the subcontractor’s [Operative’s] registration card and to ensure that it is genuine and the person producing it is the user of that card is clearly set out in paragraph 3.1 of IR 14/15.  Paragraph 6.8 also notes that failure to inspect a registration card may lead to penalty proceedings.
(2)	The non-compliance occurs each time a payment is made to any of the 1,300 Operatives; the failure is systematic and was continuous throughout the 3-year qualifying period.
(3)	The wholesale failure during the qualifying period to check the registration cards cannot be minor and technical either qualitatively or quantatively.  Given the purpose of the obligation the non-compliance is significant and important.
(4)	There has been no acquiescence by the Revenue.  The meeting before the General Commissioners’ case was about agency legislation and the officer attending the meeting, Mr Neal, is a status officer not an expert on the scheme.  The later correspondence was about whether the Appellant was within the scheme at all because of the furnishing of labour point.  Acquiescence would have required the Appellant to draw attention to the fact that it was not complying.
(5)	The failure also gives rise to doubt whether there will be future compliance because the Appellant has no direct contact with the Operatives.  
24.	On this aspect I find the following facts: Mr Jackson has many years’ experience in the industry and is familiar with the scheme and that it was introduced to avoid abuse of the tax system; he is aware of the possibility of the existence of a black market scheme for CIS cards; he accepts that the checks in Regulation 7F are an integral part of the system to prevent misuse of CIS cards; the Appellant does not see the original card and is unable to verify that it is genuine before making payment; he accepts that this is important to prevent misuse of cards; he does not meet the Operatives and so could not in the past comply with the Regulation.
25.	I was referred to the following guidance in the authorities.  Lightman J said in Hudson v JDC Services Ltd [2004] STC 834 at [6]:
“Section 565(4) provides a limited exception to the requirements of s 565(3), affording a let-out from the consequences of non-compliance in a strictly limited class of case.”
At [15] he described it as “the clear policy of the legislation to require the holder of a CIS Certificate to have a good record of compliance with no failure in the past of any significance.”  That case emphasises the separate tests in s 565(4) relating to the past and the future.  The decision that the Commissioners can substitute their own decision for that of the Inspector, rather than review the reasonableness of that decision, has been followed in all subsequent cases.
Hart J said in Templeton v Transform Shop Office and Bar Fitters Limited [2005] EWHC 1558 Ch, 15 July 2005 (not yet reported):
“The expression ‘minor and technical’ is not itself a technical expression.  The process of discerning the meaning which Parliament intended to convey is not greatly assisted by considering dictionary definitions of ‘minor’ and or ‘technical.’  Still less does it assist to point out that the failure must be both ‘minor’ and ‘technical’ to qualify.  The prospect of the relevant decision maker concluding that a particular failure is minor but not technical, or vice versa, risks introducing a degree of pedantry into the test which would deprive it of all practical value save as a moot point for legal debate.  We are dealing here with a composite phrase which must be construed purposively.  The purpose which Parliament plainly had in mind was to procure strict compliance with tax obligations by making such compliance the price of obtaining a certificate.  Parliament also recognised that failures to achieve such strict compliance might be, in the context of the grant of such certificates, venial.  Whether, in a particular case, the failure is to be so regarded is a decision which (if Hudson is correct) has been left ultimately to the Commissioners to be found as a matter of fact and degree.”
In Cormack v CBL Cable Contractors Ltd [2005] EWHC 1294 Ch, 23 June 2005 (not yet reported) Laddie J said:
“27.  …It seems to me that the words ‘minor and technical’ have to be construed in their context.  As Lightman J pointed out in Hudson, there are two discrete matters to be considered in applying section 465(4) (or section 562(10) in respect of individuals or section 564(4) in respect of firms).  One looks at the past.  The other looks to the future.  As far as the former is concerned, the underlying question is whether or not the past defaults of the taxpayer have been, to use Lightman J’s words ‘of any significance.’  Significance in this context includes consideration of whether the defaults demonstrate a cavalier attitude of the taxpayer to his obligations under the tax legislation.  Even if defaults are large or numerous in money terms, the circumstances may made them not significant for these purposes.  The words ‘minor and technical’ can have different meaning.  There is nothing in the legislation to suggest that they are primarily or exclusively concerned with size and frequency.  Some of the liabilities covered by the legislation are not concerned directly with the payment of money.  In context ‘minor and technical’ should be construed in a way which allows them to be used to gauge whether there is a risk that the sub-contractor will default on his tax obligations.  If, for example, a company is late in paying a very large tax bill because, wrongly and in breach of its customer’s instructions, the bank on which the company’s cheque is drawn fails to honour it, the breach should be treated as minor and technical even though, from an accountant’s point of view, the sum involved was large and not minor.
…
29.  [After quoting from leaflet IR 40 that the Revenue will “bear in mind the size of the business.  If it is reliant on one person, and that person falls ill for a period of weeks or months, we will take that into account.”]  This must be because the Revenue understands, correctly in my view, that the degree of culpability of the taxpayer in the default is relevant in determining whether it is minor and technical or not.
30.  If this is the correct approach, then it seems to me possible for the Commissioners to have held that, because of the acquiescence by the Revenue in late payment by CBL, the latter’s defaults could be properly regarded as minor and technical…..
…
32.  These statutory provisions are intended to impose a strict discipline of those in the sub-contracting industry.  But, for the reasons set out above, the question of whether a default has been more than minor or technical has to be assessed qualitatively in the light of all the circumstances…”.
26.	I do not believe this is a case of the Revenue acquiescing in the Appellant’s defaults in the way they seem to have done in CBL in which there was “an informal cheque-collection system…operated by the local tax office” (see [23]).  One might have hoped that in the course of their dealings with the Appellant they would have noticed the point but I accept that their attention was directed to other matters.  The complexity of tax legislation means that they cannot be alert to such matters when considering different ones.  However, I can give the Appellant credit for having volunteered this failure.  
27.	The other tests referred to in CBL, are that I must consider whether are the defaults are “of any significance,” including consideration of whether the defaults demonstrate a cavalier attitude of the taxpayer to his obligations under the tax legislation; I must gauge whether there is a risk that the sub-contractor will default on his tax obligations; and I must consider the degree of culpability of the taxpayer.
28.	Starting with the purpose of Regulation 7F, it is to prevent misuse of registration certificates by checking first that the certificate looks genuine, and secondly that the person producing it is the person named and whose photograph appears on it.  That this is an obligation that Parliament considered should be taken seriously is demonstrated by s 566(2B) imposing a penalty not exceeding £3,000 for a single failure to inspect.  I also bear in mind that we are discussing failure to inspect a registration card (without which payment cannot be made net), rather than failure to inspect a certificate (without which payment cannot be made gross).  Failure through ignorance to do this (or rather to make sure that the Client does it) does not in my view demonstrate a cavalier attitude of the taxpayer.  Indeed collecting and retaining copies of the registration cards demonstrates the opposite and is quite different from making a payment without asking about the existence of a registration card.  I certainly do not consider that the failure demonstrates a risk that the sub-contractor will default on his tax obligations.  So far as culpability is concerned, I accept that Mr Jackson was ignorant of the requirements of Regulation 7F but one would expect him as an experienced person to have read the Revenue’s literature about he scheme and to be aware of its terms.  It is not a case where anyone else is to blame. 
29.	In the light of this guidance I return to the words “minor and technical” in s 565(4) to be looked at qualitatively and quantitively.  With a great deal of regret, because I am aware that the Appellant’s business cannot operate without a certificate, I have come to the conclusion that the Appellant’s failure in the past is of some significance and does not qualify as not minor and technical.  Although it is not relevant, so far as the future is concerned, I am satisfied that the proposal of appointing the Client the Appellant’s authorised representative to inspect the registration cards (and to consider alternatives if the Revenue are not satisfied by this) would enable the Appellant to satisfy the Regulation in the future.  There is no reason to doubt that the Appellant will not comply with any other tax obligations and requests for information in the future.  Accordingly, the failure in the past does not give any reason to expect that the Appellant will not satisfy s 565(8) in the future.
30.	My decision is:
(1)	the Appellant’s business “consists of or includes the…the furnishing or arranging for the furnishing of labour in carrying out construction operations” within s 566(2) of the Taxes Act 1988);
(2)	the Appellant’s defaults in relation to inspection of registration cards during the qualifying period is not minor and technical, but in relation to future periods there is reason to expect that the Appellant will comply with s 565(8);
and accordingly I dismiss the appeal.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 23 August 2005

SC 3106/05

Authorities referred to in skeletons and not referred to in the decision:
Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471
Barnett v Brabyn [1996] STC 716
Bhadra v Ellam [1998] STC 239
Brady v Hart [1985] STC 498
Arnold v G Con Ltd, The Times, 14 March 2005
Barnes v Hilton Main Construction (unreported) 15 April 2005