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INCOME TAX and NIC – IR 35 Legislation – If there had been a direct engagement would it have been an employment? In the circumstances No – appeal allowed

THE SPECIAL COMMISSIONERS					       SC/3108/2006

	DATAGATE SERVICES LIMITED	Appellant

– and –

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	ADRIAN SHIPWRIGHT

Sitting in public in London on 23 July 2007

John Antell, Counsel for the Appellant instructed by LawSpeed Limited

Michael Faulkner of Appeals Unit South, HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction
1.	This decision concerns:
a.	An appeal against a determinations under Regulation 80 Income Tax (PAYE) Regulations 2003 against Datagate Services Limited (“Datagate”) in the amount of: 
i.	£ 8,895.46 for 2001-02
ii.	 £9,539.76 for 2002-03
iii.	 £10, 339.16 for 2003-04
b.	An appeal against a decision under section 8 Social Security Contributions (Transfer of Functions) Act made on 21 July 2005 that Datagate is liable to pay primary and secondary class one National Insurance contributions of £17,482.87 in respect of the period to 6 April 2001 to 5 April 2004.
2.	The parties are agreed that if the “IR 35” provisions applied, the amount shown in the determinations and decision is correct.  I am also told that the Special Commissioner’s decision will be followed for the years ended 5 April 2005 and 2006.
The Issue
3.	The Parties agreed that the point at issue is whether, had the arrangements taken the form of a contract between Mr Barnett and MBDA, Mr Barnett would have been regarded as an employee of MBDA.
4.	The Parties also agreed that the position was the same in these circumstances for both income tax and national insurance.
The Law
The Legislation
5.	The Law for income tax purposes is found in Chapter 8 Part 2 ITEPA (re-enacting Schedule 12 FA 2000).  It provides so far as is relevant:
“48 Scope of this Chapter
(1) This Chapter has effect with respect to the provision of services through an intermediary. ….

49 Engagements to which this Chapter applies
(1) This Chapter applies where—
(a)     an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”),
(b)     the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
I     the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.…
(4) The circumstances referred to in subsection (1)I include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.
(5) In this Chapter “engagement to which this Chapter applies” means any such provision of services as is mentioned in subsection (1). …

56 Application of Income Tax Acts in relation to deemed employment
(1) The Income Tax Acts (in particular, the PAYE provisions) apply in relation to the deemed employment payment as follows.
(2) They apply as if—
(a)     the worker were employed by the intermediary, and
(b)     the relevant engagements were undertaken by the worker in the course of performing the duties of that employment.
(3) The deemed employment payment is treated in particular—
(a)     as taxable earnings from the employment for the purpose of securing that any deductions under Chapters 2 to 6 of Part 5 do not exceed the deemed employment payment; and
(b)     as taxable earnings from the employment for the purposes of section 232.
...”

6.	The Law for Social Security Contributions purposes is found in the Social Security Contributions (Intermediaries) Regulations 2000.
The Authorities
7.	I was provided with copies of the following authorities which I have read and considered carefully:
Hall v Lorimer [1992] STC 599
Ansell Computer Services v Richardson [2004] STC (SCD) 472
WHPT Housing Association v SOSS [1981] ICR 737
The Evidence
8.	An agreed bundle of documents was produced. No objection was taken to any of them and they were all admitted in evidence.
9.	I heard oral evidence from: 
Bret Barnett, the Appellant’s director and shareholder of Datagate;
Simon Wycherley of MBDA, the relevant Team Leader;
Nicole Hartland, formerly an HR Manager at MBDA’s Stevenage office.

10.	Witness statements were provided for all three.  A witness statement was also provided for Roger Bartlett.  Unfortunately, he was unable to give evidence and be cross-examined because his wife was having a baby.
11.	A statement of facts not in dispute was also produced.
12.	Ms Hartland’s evidence was necessarily of a general nature and by reference to a generalised document concerning employment at MBDA.  I found her an entirely honest and competent witness but unable to shed light on Mr Barnett’s precise circumstances.  Whilst I am grateful for the helpful way she gave her evidence it did not assist me in my task which is concerned with Mr Barnett’s individual circumstances not the general employment position at MBDA.
Findings of Fact 
13.	From the evidence I make the following findings of facts:
(1)	Mr Barnett is a person with wide experience of the design and development of computer software.
(2)	Mr Barnett is the sole director and shareholder of Datagate.  It is a closely held company under his control.  He has no written Contract with Datagate.
(3)	Datagate was incorporated on 2 February 1999 and began trading on 29 March 1999.  The accounts describe its principal activity as computer consultants.
(4)	Datagate entered into a contract with Technology Project Services International Limited (“TPS”).
(5)	The terms of this contract, an hourly rate plus VAT invoice. 
(6)	Clause 8 provided so far as relevant:
	8.1 This Contract is a contract for the provision of Professional Consultancy Services; the relationship governed by this contract is neither that of agent-principal, nor that of the employer-employee. Any Consultants provided by you are and will remain employed by you; they are not employed by us, and during this Contract will not be employed by the Client. ...
8.5	This Contract is not exclusive, and you and your Consultants are and remain at liberty to also provide services of third parties.
(7)	Clause 9 of the Contract restricted the provision of services to the Client other than through TPS for a period of six months. I find that this was not a restriction of a type normally find in an employment contract.
(8)	TPS had an arrangement with MBDA for the supply of services.
(9)	TPS entered into the initial arrangement on 10 January 2001 which ended on 10 April 2001.  The arrangement was extended until the 30 September 2004.
(10)	Work had to be carried out by a particular person because of security (cf Ansell)
(11)	There was no provision for a minimum number of hours to be worked.  There was also an ability to take time off.  
(12)	There was a right to provide substitute so long as suitable security clearance was obtained.
(13)	Mr Barnett could arrive when he liked. He could leave when he liked. He tended to arrive after 0930 hours and leave before 1600 hours so as to suit his lifestyle.  
(14)	Mr Barnett could take time off when wanted to but of courtesy discussed it with the team leader.  
(15)	Mr Barnett worked with the relevant team but was provided with discrete sections of work.  MBDA wish to learn from him.
(16)	I find that Mr Barnett’s relationship with the MBDA team was that of a professional consultant providing independent services when looked at as a whole.  
The Submissions of the Parties
The Appellant Submissions in outline
14.	In essence, the Appellant submitted that:
a.	Mr Barnett was not an employee, he was like any other “self employed” consultant.
b.	There was nothing in the documentation to show he was employed as an employee.
c.	The rate was fixed with the agency by Datagate.
d.	There was no Contract of Employment.  What Mr Barnett did was act as Consultant, as an independent contractor.
e.	The precise way this was done was for security reasons and the convenience of the parties.  This did not make him employee.
f.	Accordingly, the appeal should be allowed.
HMRC’s Submissions
15.	In essence, HMRC submitted Mr Barnett was effectively an employee.
16.	This was because:
a.	MBDA had a right of control.
b.	The Ansell case was different (see particularly paragraph 24 of his decision).
c.	Mr Barnett’s obligations were those of an employee.
d.	The Purchase Orders were the Contract.
e.	The documents show this was the equivalent of a Contract of Employment.
f.	All the evidence shows Mr Barnett was treated in the same way as employee.  He worked in the same way.
g.	The time he worked was agreed with MBDA.
h.	The work he did was agreed with MBDA.
i.	Mr Barnett took part in a trip to Portsmouth at MBDA’s request.
j.	The HR document showed he was an employee.
k.	He wore a work badge.
l.	The pay rates were employee pay rates.
m.	There was a disciplinary procedure which was the same as the other employee.
n.	Mr Barnett was integrated into MBDA’s business because there were three in team producing an integrated product.
o.	Accordingly, the appeal must be dismissed.
Discussion
Introduction
17.	From Ansell it is clear that the question that I have to answer is “looking at the picture as a whole [do] I find as a primary fact that Bret Barnett was in business on his own account and was not a person working as an employee in someone else’s business” in all the circumstances of the case.  I also remind myself that the onus of proof is on the Appellant.  
18.	HMRC Manuals’ draft letter sets out a list of relevant factors which I consider of use.  These factors include:  
a.	Whether there is an ultimate right of control on the part of the engager over what tasks have to be done, where the services have to be performed, when they have to be performed and how they have to be performed.
b.	Whether personal services required.
c.	Whether the worker has the right to provide a substitute or engage helpers.
d.	Who has to provide the equipment and/or materials.
e.	Whether the worker has a real risk of financial loss.
f.	Whether the worker has the opportunity to profit from firm management, for example by reducing overheads and organising work effectively.
g.	The basis of payments.
h.	Whether there are “employee type” benefits, for example, sick pay, pensions, holiday pay, etc.
i.	Whether the worker works exclusively for the engager.
j.	Whether the worker is part and parcel of the engager’s business or organisation. 
k.	Whether there is a right to terminate the engagement by giving notice of a specific length.
l.	Factors personal to the worker, for example, number of engagements in business organisation.
m.	The intention of the engager and worker as regards employment status.
19.	I have carefully considered these factors.  In considering these factors I have borne in mind that there is a strong security requirement here.
20.	I do not consider that there was an ultimate right of control on the part of MBDA of the type the Manual implies.  The engager MBDA could have continued with the engagement had it chosen to, or chosen not to renew the engagement.  I do not consider here the position was one of an ultimate right of control as would be the case of an employee.  Even if there were I do not consider in the particular circumstances that this would be of the same nature as for an employee.  If there was an ultimate right of control this was because of the security requirements and not anything akin to that underemployment law.
21.	There is nothing in the documents requiring personal service.  
22.	The documentation allowed for a substitute to be provided or help us engage.
23.	The equipment and materials were provided by MBDA but given the security context it would have been surprising had it been otherwise.
24.	The requirement that the worker has a real risk of financial loss is somewhat circular.  If the worker is in business on his own account there must be a risk of financial loss.  Here, he risked not being continued to be engaged.  
25.	Mr Barnett was able to profit from sound management by organising his work effectively so as to save himself time and give himself more free time which he had told me was part of the reason that he organised his work in the way that he did.  
26.	The basis of payment was a fee basis.  This is entirely consistent with self employment.  On the evidence before me there was no employee type benefit such as sick pay or pensions provisions.
27.	There was no requirement that Mr Barnett work exclusively for MBDA.  
28.	Whilst the position was that Mr Barnett was engaged in assisting MBDA’s business I do not consider that he was “integrated” as an employee in the way that the Tort cases sometimes suggest.  There was evidence that MBDA sought to give him specific projects which so far as possible which were self contained.  I find as a fact that Mr Barnett was not integrated into MBDA’s business or organisation.
29.	The engagement could be terminated but I do not regard this as being the equivalent of being able to give notice under a contract of employment.
30.	I do not find that the number or continuation of employment gives rise to employment status.
31.	The intention of the parties seems to have been that there should be no employment.  Why else would this structure have been set up?  I find as a fact that the parties intention was that there should be no employment.  
32.	Standing back and “looking at the picture as a whole I find it a primary fact that Bret Barnett was in business on his own account and was not a person working as an employee in someone else’s business on the hypothetical requirements that the legislation requires. He chose to do this through his company.
33.	Accordingly, the appeal is allowed.

SPECIAL COMMISSIONER
RELEASE DATE: 20 December 2007

SC/3108/2006