London Recruitment Services Ltd v Revenue & Customs [2006] UKSPC SPC00546 (07 June 2006)

                                                                                                            SPC00546  

CONSTRUCTION INDUSTRY CERTIFICATES - Preliminary issue being an appeal against Assessments under Regulation 14 of IT (Sub-contractors in the Construction Industry) Regs 1993 SI 1993/743 -  Appeal dependent on whether Appellant’s contract for the supply of workers to it was a contract simply with one counter-party sub-contractor (which held a CIS 6 Certificate) or whether that sub-contractor was itself contracting as agent for numerous “employing companies” none of which held such certificates - Appeal allowed on the preliminary issue

THE SPECIAL COMMISSIONERS

LONDON RECRUITMENT SERVICES LTD	Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Special Commissioners: HOWARD M NOWLAN
STEPHEN OLIVER QC

Sitting in public in London on 24, 25, and 26 April and 8 and 9 May 2006

Giles Goodfellow Q.C. , counsel for the Appellants
Tim Eicke,  counsel for the Respondents

© CROWN COPYRIGHT 2006

DECISION

INTRODUCTION 

1.   This was a potentially complex and an urgent appeal. It related initially to numerous points material to the cancellation by HM Commissioners for Revenue & Customs (“HMRC”) of London Recruitment Services Limited’s Constructors Industry CIS 5 certificate, as well as to substantial assessments on the company. These assessments were largely dependent on the contention that when it had paid invoices from a particular sub-contractor, that sub-contractor had been acting as nominee for various underlying companies, and that gross payment was not thus permitted under the Construction Industry Sub-Contractors rules because none of the underlying companies had CIS certificates, and it was not sufficient that the actual payee alone held such a certificate. For reasons that will become clear we were eventually asked to give an oral decision on the contractual issue that governed the validity of the assessments, and following this decision, all other points were settled between the parties.   

2.    In order to put the points in contention in context we need to give a brief summary of the various roles of different categories of company in the construction industry, and a short summary of the Construction Industry Sub-contractors rules.

THE DIFFERENT BUSINESS ROLES.

3.    London Recruitment Services Limited (“LRS”) conducts the business sometimes referred to as an agency business in the industry, meaning that it acts as an intermediary between construction companies that periodically want to engage workers who are not their own full time employees, and companies referred to as “composite companies” which almost invariably employ such workers.    

4.     When a construction company wishes to engage the services of such workers, it will often request, and contract with, an agency company to arrange for the supply of such workers. The agency company does not itself employ construction industry workers, but has various contacts with workers and with the composite companies.
   
5.     The method of operation of the composite companies is generally that workers will be employed either by the single composite company, or more often by one of several loosely affiliated composite companies, and generally each worker will hold one share in his employing company. For various reasons, which were not particularly in issue, the composite company will often pay fairly low wages to the employee, and will then declare dividends to the worker in respect of his shares, after taking its own turn in one way or another out of the fees received from the agency company for the work of the particular individual. We were told that the objective of this structure was to ensure that employees did not have to bear expenses out of taxed income, and also so that NICs would not be due, and less tax might be due, in respect of that part of a worker’s total income received in the form of dividends as distinct from wages. 

6.     The agency company performs essentially three roles. Its prime function is to build up contacts with groups of workers, and more particularly the composite companies so that it can meet demands for labour when requested to do so by one of the construction companies. It also performs an element of a financing role in that the composite companies always want to be paid weekly because their employees in turn wish to be paid weekly. The construction companies prefer to be billed monthly in arrears, so that the agency company typically pays the composite companies before it itself receives payment, albeit that it makes a turn on the supply of labour that it arranges. Thirdly, it performs the function, very much in conjunction with the composite companies, of enabling workers (particularly those not adept at marketing their own skills) to obtain work. 

THE RELEVANT CONSTRUCTION INDUSTRY SUB-CONTRACTORS (“CIS”) RULES

7.    In order to prevent small sub-contractor companies from paying their workers without accounting for PAYE tax and NIC, and then “disappearing”, there has for a considerable time been a scheme in place whereunder construction companies are required to deduct tax at a particular rate (currently 18%) and account for it to  HMRC, when paying sub-contractors for the labour, as distinct from the materials, content of sub-contractors’ invoices. Certificates are then issued to the payees, who can apply the tax deducted against their own tax liabilities. 

8.    These tax deductions are unpopular in the industry because the construction companies suffer the inconvenience of having to deduct, and issue the various certificates, and the payees suffer the cash flow disadvantage of receiving a reduced net sum at the point of payment, before they would otherwise be liable for their various taxes. These difficulties can be avoided if sub-contractors apply for and satisfy the conditions for the issue of a certificate (either a CIS 5 certificate or a CIS 6 certificate, the difference being immaterial to the dispute in this case) and acquire one or other certificate. The conditions are designed to ensure that the certificates are only issued to reliable companies that are not going to fail to meet their tax liabilities, and there are provisions enabling HMRC to cancel the certificates if these expectations are not met in any way. The certificate then enables the holder to show the certificate to construction companies paying it, whereupon the payers can then pay gross. This facility is potentially relevant at both stages in the chain for the provision of labour described in paragraphs 4 to 6 above. The construction company will have to deduct tax from payments made to the agency company such as LRS unless LRS itself holds and produces one of the two CIS Certificates. In its turn LRS would have to deduct tax, in this respect as a “contractor”, when paying its sub-contractor, i.e. the composite company that employs the workers, unless the composite holds and produces an equivalent certificate. 

9.    Under the CIS rules, it is clear that if a sub-contractor (for instance the composite company referred to above) is contracting as nominee for other companies (generally called “employing companies” in the context of composites for a reason that will be made clear below), then the contractor paying the sub-contractor will only be able to pay invoices gross if both the nominee and the company for which the nominee is acting, hold and produce the relevant certificates.    

10.    We were told in evidence that some major construction companies refuse to deal with sub-contractors that do not hold one of the relevant certificates.  

THE FACTS AND THE DISPUTE IN OUTLINE

11.   In the course of performing its role as an agency company, LRS hired labour from a number of composite companies. From November/December 2003, one of LRS’s main sources of labour among the composite companies was a company called Europay Limited (“Europay”) which had been formed by and was owned by Seamus Kelly, an Irish resident who had earlier been a director of, but not a shareholder in, LRS itself.

12.    Europay obtained its CIS Certificate on 24 December 2003, and following that date, LRS discharged invoices rendered against it by Europay gross, i.e. without deducting the 18% tax in respect of labour content. This practice continued until a date in November or December 2004, when HMRC, on challenging various aspects of the way in which Europay was operating, cancelled Europay’s certificate.  In the light of the loss of its certificate, and of various assessments made against it, Europay ceased trading and went into liquidation. 

13.    LRS thereafter continued its business, generally accessing construction labour through the various other composites. It also had a non-construction labour agency business, and it was said that the turnover of both limbs of its business, and their profitability were both increasing and that the company had a successful business.

14.    In October 2005, following a review of LRS’s PAYE procedures for its own office staff, which it appears was concluded entirely satisfactorily and amicably, questions began to be filtered through the HMRC officers who had been dealing with the PAYE enquiry from a separate HMRC team dealing with CIS compliance matters. The managing director of LRS, Per Brooke Barnett, who had taken over the role on the departure of Seamus Kelly in December 2003, initially tried to respond to the questions being raised, and we will refer below to one of the documents that Mr. Barnett forwarded to HMRC, in response to a request for certain documents. 

15.   Whilst Mr. Barnett and LRC’s advisers were perhaps slightly slow to appreciate the significance of the points being advanced by HMRC in correspondence (perhaps partly because the arguments were being filtered through officers who did not understand fully the questions that they were asking) the main contentions were as follows.   

16.   The most significant was that LRS should have deducted tax from all payments made to Europay, following the issue to Europay of its CIS 6 certificate and up until Europay ceased trading, because Europay was acting only as a nominee for “other employing companies”, none of which held CIS certificates. Accordingly LRS was liable for the tax that it should have deducted, notwithstanding that it had already paid 100% of the gross invoiced amounts to Europay. The amount assessed in respect of this contention is not strictly material to this issue.

17.    LRS was then asked to engage in urgent meetings to address this alleged failure to pay its proper tax, and other more minor irregularities that the CIS team were exploring. The detail of all these was once material to the dispute before us, but it has now ceased to be relevant. 

18.    Following an unsatisfactory meeting on 7 February 2006 between HMRC and LRS’s advisers who had not been fully briefed, and at a time when it had been made clear in advance that Mr. Barnett would not be able to attend the meeting, HMRC decided on 10 February to cancel LRS’s CIS 5 Certificate immediately, and HMRC also assessed LRS for the tax referred to at 16 above, and other more minor amounts. 

19.    LRS immediately appealed against both the cancellation and the assessments.   The appeal was set down for hearing as a matter of urgency. The urgency resulted from the fact that the cancellation of the Certificate had three immediate consequences, namely that certain companies would cease dealing with LRS, LRS would suffer the cash flow disadvantage of initially receiving only 82% of the amounts that it was entitled to invoice against its remaining customers, and its bank finance (geared to its actual cash receipts) would be reduced by approximately 18%.    Beyond this if the assessments were upheld, it would almost certainly be insolvent.

20.    At a Directions Hearing, requested by LRS, in the period between 26 April and 8 May, it was reported that LRS’s bankers were likely to withdraw their support unless matters were clarified extremely quickly. Since counsel were not going to be available for a very long time if the case could not be completed on the only three remaining dates convenient to all parties, we were asked to direct that the resumed hearing on 8 May should deal solely with the contractual point as to whether LRS had contracted with Europay as principal, or whether Europay had been a nominee for other companies, (“the contractual issue”). We were then asked, if possible, to give an immediate oral decision on the contractual issue, once the submissions had been completed. This we did immediately after the final submissions on 9 May, in LRS’s favour.

21.    Following that decision, HMRC immediately announced that they would reinstate LRS’s CIS 5 certificate for the residue of its initially stated term, whereupon the only matter remaining in dispute was the appeal against much more minor assessments which it was agreed would be dealt with on 15 May, the final day fixed for the hearing. On 12 May we were notified that the parties had settled these remaining issues.

22.    Whilst the dispute on very many points that were once in contention has been rendered irrelevant by the re-instatement of the CIS 5 certificate, and by the subsequent settlement, we have been asked by the parties to record in writing the reasons that were given orally and in outline for our decision on the contractual issue.

THE APPELLANT’S CONTENTIONS ON THE CONTRACTUAL ISSUE

23.     It was contended on behalf of the Appellant that:-

1.   the wording of s.599(2) Taxes Act 1988, which required (in nominee situations) certificates to be held by both nominees and the person who nominated them before contractors could make payments without deducting tax only applied if the person nominating the nominee and the nominee had both been identified; and that in this case there had been no identification of any person appointing Europay as its nominee;  

2.   on the facts, Europay had always been the only counter-party under the contract with LRS and Europay had always acted as principal, with the exception of a few supplies made in November 2004, when Europay began (following the receipt of advice from new advisers) to arrange for a few new employees to be engaged through different companies. LRS itself had been unaware of this change in procedure, and it only occurred very shortly before the operation of all Europay companies ceased following the cancellation of Europay’s CIS 6 certificate; and

3.   the contract between LRS and Europay had always been an oral contract, this, it was alleged, being fairly normal practice in the circumstances.     

THE RESPONDENT’S CONTENTIONS ON THE CONTRACTUAL ISSUE 

24.    It was contended on behalf of the Respondents that:-

1.   there was a written contract between LRS and Europay;

2.   the terms of that contract were those contained in a document that Europay had sent to the HMRC, in the course of raising questions about I.R. 35 issues, that document showing the parties as LRS and Europay, with Europay said to be contracting as agent for various “employing companies”, albeit that the document sent to HMRC was not dated or executed by LRS; 

3.   that when in October 2005, HMRC had asked Mr. Barnett to provide the “Ts & Cs” for LRS’s dealings with various of its counter-part composite companies, including Europay, the document that had been sent to HMRC  in respect of Eurpay appeared to be the type of contract that would exist between Europay and distinct Europay employing companies if the structure was one under which the employees were employed by various different companies, and Europay’s own role was to render administrative services to those companies; 

4.   that shortly after the formation of Europay, various other companies with numbers after the name “Europay”, such as “Europay (1000) Limited” had been formed, and that in pay-roll print outs employees had been given reference numbers that corresponded to these company names and numbers, followed by a letter, for instance “1000F”, perhaps indicating that the particular employee was employed by Europay (1000) Limited, and that he held a share designated as the F share in that company; and

5.   that the “starter-pack documentation” provided by Europay to new employees periodically suggested that there were distinct employing companies, and that it was not the case that all workers would be employed solely by Europay itself. 

EVIDENCE

25.    Evidence was given before us by Mr. Stephen Besford, one of the advisers to LRS, by Mr. Barnett, managing director of LRS from 1 December 2003, and by Mr. Kelly who had been a director of LRS until December 2003, and who was thereafter the owner and managing director of Europay.  

26.    We will not need to refer to Mr. Besford’s evidence in recording our decision on the contractual issue. We will refer to the relevant parts of the evidence given by Mr. Barnett and Mr. Kelly in the course of giving our decision below. We found Mr. Barnett to be an entirely reliable witness. We also found Mr. Kelly to be reliable, though the particular description that Mr. Kelly gave to one aspect of the business administration appeared slightly far-fetched, though we thought still fundamentally true. 

OUR DECISION

27.    On the first of the points contended on behalf of the Appellant, we were not persuaded that principals, behind agents or nominees, had to be identified for it to be essential for both the nominees and their principals to hold and produce CIS 5 or 6 certificates, before payment could be made gross. We had no need to reach a final decision on this point, in the light of our decision on the more basic factual contention that Europay only ever contracted with LRS as a principal, but it certainly seemed to us that if an acknowledged contract provided on its face that Europay was contracting as agent or nominee for “employing companies”, and that was indeed the reality, then the Appellant’s contention would not have been sustainable.  Indeed even in fact if the contracting sub-contractor was entirely silent in its contract that it was in fact acting as a nominee for another or other companies, it appears that certificates might very well still be required from all companies before the contractor would be able to pay gross.  The apparent inequity of this construction appears largely to be answered by the fact that under Regulation 10(2) of the IT (Sub-Contractors in the Construction Industry) Regs, SI 1993/743, it is open to the collector to direct that a contractor should not be liable to pay amounts that should have been deducted, “where the under-deduction or failure to make a deduction was due to an error made in good faith”.  

28.    On the more basic contractual question, we found it difficult to rationalise the facts for a number of reasons. There was no doubt that Europay’s structure had been set up with the bare minimum of taxation and legal advice, and that Mr. Kelly had paid little or no attention to putting written contracts in place. In many respects the administration appears to have been a shambles, which from the perspective of Europay, whose operation depended on efficient and precise operating guide-lines was probably the cause of the challenges made by HMRC that have led to the liquidation of Europay. When thus LRS’s appeal was dependent, at second-hand, on the structure of Europay, and no evidence was given by any of the employees, accountants or other administrators within Europay, our conclusions had to be based to some extent on impression and common sense, rather than on hard evidence, and also on the credibility of the evidence given by Mr. Barnett and Mr. Kelly.  

29.    We think that it is clear that when Mr. Kelly formed Europay, and evolved its intended business model, he started by obtaining the standard documents of what we were told was the largest composite, namely Gaben Management Limited (“Gaben”), from Gaben’s web-site, and he printed out these documents. The Gaben documents that we saw clearly suggested that the method of operation was for a central company to undertake all the administration work and for employees to be employed by various different “employing companies”, and presumably to hold a share each in one of those companies, carrying the entitlement to dividends equal to the net profits attributable to that worker/shareholder (after wages, administrative charges rendered by the central company, and an appropriate provision for Corporation Tax). There were clearly one or more advantages in the use of numerous employing companies, rather than the simpler structure under which all workers would be employed by the one company, subscribing a share in that company. The manor advantage seemed to be that if the employing companies could be structured so that they were not associates of the central company and of one other for the purposes of the provisions dealing with the small and starter companies’ rates of Corporation Tax, then the aggregate fee income attributable to the controlled number of workers that would be employed by each company, less the wages paid out and less the costs and profit margin charged by the central administration company for running the structure, would leave only a modest profit.  Accordingly the rate of Corporation Tax that would have to be provided for, before declaring dividends, would be more likely to be the starter company’s rate, rather than one of the higher rates, i.e. the small company’s rate or the normal rate of Corporation Tax. In the case of a company such as Gaben, it seems reasonable to suppose that if all workers were working for one single company, the aggregate profits of that company, accumulating the administration profits with the net profits attributable to countless workers would result in the company being liable for the full rate of Corporation Tax. Accordingly the provision that would have to be made for that tax would be likely to exceed whatever other savings the structure was meant to deliver.

30.   It was clear that at one time Mr. Kelly was considering adopting a multi-company structure along these lines, because shortly after the formation of Europay, numerous other companies were formed. Whilst the Memorandum and Articles of Europay itself would have enabled special or “alphabet” type shares to be issued to each employee, it is worth observing that the Articles of the various other companies were drafted rather more obviously to facilitate such share issues.

31.    Mr. Kelly contended however that whilst he was in correspondence and in discussions with HMRC in October and November 2003 about the operation of PAYE procedures before Europay had commenced its operations, he changed his initial plan, and decided that Europay would be the sole operating company.  Mr. Kelly apparently decided that it would be more efficient in terms of administration and for dealing with clients if Europay carried out all construction operations directly rather than try to control these services through over 50 different companies which would each need it own payroll system and own internal client billing and controls. We believed this evidence.  The actual correspondence with the PAYE specialists appeared not to be that significant because we were told that it was then common practice for one company in a group to deal with the PAYE affairs for controlled companies even if they were operating, and should strictly have dealt with their own PAYE responsibilities. And the correspondence with the PAYE specialists was consistent with this having been the intention. We were however told that it was only in the midst of these discussions that Mr. Kelly decided to change his plan. Amongst the reasons why we found this evidence credible were the facts that with a smaller start-up operation than that of Gaben, it would indeed be simpler for all activities to be dealt with in one company; this would save the cost and complexity of preparing accounts for different companies and having those accounts audited; it would make it easier for the one single company to satisfy the conditions for the issue of the critical CIS certificate; and with more modest profits in the early period, the aggregation of profits for the purpose of providing for the right rate of Corporation Tax would be less of a concern.

32.    There were many other factors that seemed to us to support this alleged change of plan, and the proposition that until an intended later change in October or November 2004 just before HMRC’s challenge to the operations of Europay resulting in its liquidation, all activities were conducted through the one single company. 

33.   It was undisputed that Europay was the only company with a bank account.  All of the contracts of employment that we were shown indicated that the workers were employed by Europay itself, with the exception of one entered into after the further change of plan referred to in the second of the Appellant’s contentions listed in paragraph 23 above.  Had the multi-company structure been adopted, we would have found it more natural for the few administrative employees to be employed by Europay itself and for none of the construction workers to confuse the situation by being employed by the administration company.  All invoicing was done by Europay.    Again Europay could theoretically have invoiced customers on behalf of underlying companies, but there was no evidence of this.    

34.    Further support for the proposition that until the proposed later change referred to in paragraphs 23 and 32 above, all dealings were undertaken solely through Europay  is derived from the fact that all of the companies formed by Mr. Kelly other than Europay itself appeared to be entirely dormant, and this was not challenged by the Respondents.  It appeared to us extremely unlikely that the legal position would in fact have been that the other companies were beneficially entitled to profits, and the true employers of many or all of the workers, and that Europay and possibly its accountants had been complicit in some sort of fraud to reverse all the entries out of the other companies and back into Europay.  Had this been so, it certainly follows that somebody would have needed to show uncharacteristic foresight to appreciate in around November 2004 that in October 2005 HMRC might raise questions with LRS in response to which it would be convenient to demonstrate that Europay was the only trading company, and thus the only company with a need for a CIS 5 or 6 certificate. Equally it would have to follow that in order to support the proposition that all of the other companies had been dormant, they would have had, all along, to have  filed absolutely nothing with the Companies Registry, demonstrating activity, profits or accounts.  In response to Mr. Kelly’s suggestion that all of the other companies had been dormant, nothing emerged in cross-examination that indicated that any of these other companies had filed anything at all at the Companies Registry that conflicted with the suggestion that they were dormant. 

35.    Counsel for HMRC put two questions to Mr. Kelly which had a considerable bearing on the points just canvassed, to which we found Mr. Kelly’s answers somewhat implausible. One question related to the references given to every employee to which we have already referred, such as “1000F”, which might have suggested that the particular employee was employed by Europay (1000) Limited and that he held, or was entitle to the issue of the F share in that company.  The other question, based on a Schedule that HMRC asked us to admit as evidence in chief on the morning of 8 May, which we refused to do, was why a Schedule had come to light referring to the “composite companies’ share of profits and losses from work carried out in Europay Limited (pre September 2004)”.

36.    Mr. Kelly’s answers to these two questions were to say that the number references were references to “divisions within Europay”, and that the Schedule just referred to was also indicating allocation of profits to divisions.  We found both of these answers hard to accept at face value, though in relation to the first we concede that it was rendered somewhat more feasible by the fact that although there were many numbers that corresponded to the names of the other companies, there were several numbers that bore no relationship to actual companies at all.  The position that seemed to us to be more credible was that some of the book-keeping continued to reflect the original plan of operating through different companies, and the same references, and profit allocations were made even when all of the results were booked in the one and only company and all the other companies were shown as dormant.   We found this rationalisation more credible than the proposition that there had in fact been a fraudulent reversal of profits from the other companies back into Europay, all a year before the possible significance of this point emerged, and mercifully leaving no trace at Companies Registry of the one time operation of a considerable number of companies. 

37.    Clarifying the facts has been rendered more difficult by the apparent fact that even if it can ever be established that workers were entitled to hold a share in some company, we assume “Europay”, no actual share was ever issued to any worker in any company, so that no register of members can shed any light on which company employees were meant to be shareholders in. 

38.    Whilst we found Mr. Kelly’s description of divisions, in response to the two questions referred to in 36 above somewhat strange, we were very impressed by Mr. Kelly’s immediate answer to a question that we put to him as to the rate of Corporation Tax that had been provided for in declaring dividends to workers.  Mr. Kelly’s immediate answer was that a provision of 22% had been made, as to a very small part for expenses, and as to the balance to provide for Corporation Tax at the small companies’ rate, being the applicable rate in the event that all of the profits were the profits of Europay itself.  We note that this would have been the appropriate rate even if the profits had been spread among all the other companies anyway, because no-one other that Europay owned any shares in the other companies, so that they would anyway have been associates, and all their profits would have had to be aggregated for the purpose of the rules relating to the appropriate rates of tax.  It still appeared to us to be most improbable, however, that the multi-company scheme had been fully implemented so as to diminish the rate of Corporation Tax, but that nevertheless Mr. Kelly had failed to procure the issue of the required shares to ensure that the various companies were not associates, and had at the same time observed that because of this failure it would be necessary to provide for Corporation Tax at a higher rate, so entirely forfeiting the purpose and benefits of the more complex structure.  

39.    We must finally deal with the various points that HMRC had contended supported their contention as to the true contractual position. 

40.     The contract that was forwarded by Mr. Kelly in the course of his pursuing IR 35 enquiries with the HMRC specialists on that topic admittedly referred to LRS but it was neither signed by LRS nor dated.  Mr. Kelly contended that the contract was not in fact in force and had never been sent to LRS, and we accept this proposition without hesitation because he must clearly have confirmed this at the time to the HMRC officials with whom he had raised the IR 35 questions as they replied that they were unable to comment on specimen contracts that were not actually in force. 

41.    When in October 2005 Mr. Barnett sent HMRC the “Ts and Cs” for LRS’s dealings with various of the composites, including Europay, we accept Mr. Barnett’s explanation that as he had no “Ts and Cs” in respect of any dealings with any of the composites, he rang up the three companies whose terms he had been asked to produce, and asked them to supply their contracts.  The copy contract that Mr. Kelly sent to Mr. Barnett and that Mr. Barnett forwarded to HMRC was a copy contract (presumably  based on a Gaben contract) that would have been entered into between Europay and Europay employing companies (if it had been entered into at all), and it could not conceivably have been entered into with LRS.  We consider that the fact that both Mr. Kelly and Mr.Barnett  provided this copy contract without observing that it was the wrong contract on any basis, and presumably without having read a word of it, indicates that neither attached any importance to the print out, and that it was only being sent to HMRC in an effort to be helpful and to comply with the HMRC request for a copy of the “Ts and Cs”.

42.    We accepted the proposition on the part of HMRC that Europay’s starter pack documentation suggested that there would be a number of employing companies, but we viewed this as a marketing document, possibly one drafted at the very outset, and possibly one whose terms might have repeated some of the terms of the equivalent starter packs of other composites.  We thought it probable that it reflected the structure that Mr. Kelly had at one time envisaged, and not the actual structure. 

43.    The final very important point that we make is that we were entirely persuaded by the evidence from Mr. Barnett and Mr. Kelly that they always traded on the basis of a simple oral contract; that LRS and Mr. Barnett never saw a written contract at the time there were dealings with Europay; that Mr. Barnett never read the wrong contract that he was sent by Mr. Kelly in October 2005; and that the implicit terms of the simple contract between Europay and LRS were that it was Europay that would supply workers, for which LRS would pay Europay. 

44.   For all these reasons we consider that whilst the somewhat chaotic operations of Europay have not made it particularly easy to identify the nature of the contract between LRS and Europay, we decide that there was an oral contract between the two companies, and that Europay was acting as the only principal under that contract.

45.    It follows that we find for LRS on the points dealt with in this decision on the contractual issue.  The parties are at liberty to come back if any further decisions or directions are required in calculating the amount by which the assessments should be reduced as a result of this decision.  

HOWARD M. NOWLAN

STEPHEN OLIVER Q.C.
SPECIAL COMMISSIONERS

RELEASED: 5 June 2006

SC 3036/2006