Spc00685

INCOME TAX & NATIONAL INSURANCE – IR35 - Worker supplied through intermediaries – whether circumstances were such that had the services been provided under a contract directly with the worker the worker would have been an employee –Ye s–  Appeal dismissed

SPECIAL COMMISSIONERS

	ALTERNATIVE BOOK COMPANY LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

Special Commissioner: MICHAEL TILDESLEY OBE	 

Sitting in public in Cardiff on 22 and 23 January 2008 with final representations by 27 February 2008

John Antell counsel instructed by Lawspeed Limited for the Appellant 

Susan Jones and Colin Williams, HM Inspectors of Taxes for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal

1.	The Appellant  was appealing against determinations requiring it to pay tax for the years 2000-01 and 2001-02 and national insurance contributions for the period 6 April 2000 to 5 April 2002  on deemed payments to Keith Shepherd, the Appellant’s sole director and shareholder, in respect of  his work for Gerling NCM (now known as Atradius). The notices of the determination under regulation 80 of the Income Tax (PAYE) Regulations 2003 and section 8 of the Social Security Contributions (Transfer of Functions) Act 1999 were made on 9 December 2005.
2.	The determinations were made under what is commonly known as the IR35 legislation which was enacted for the purpose of curbing the tax advantages enjoyed by some individuals who supplied their services through a personal service company to a client. Under the IR35 legislation if it was found that the services provided by the person were given as an employee rather than genuinely as an independent contractor the fees paid to his personal service company would not be treated as company revenue upon which corporation tax was payable but rather as deemed salary to him.  The company would then be responsible for the accounting of tax and national insurance contributions on the deemed salary. 
3.	Mr Shepherd who was a skilled IT consultant provided his services to Gerling NCM through a series of two connected contracts. The first was a contract between the Appellant and Computer People Limited, a recruitment agency, to perform services for Gerling (NCM) (“the lower level contract”). The second was a contract between Computer People Limited and Gerling NCM to supply the services of the Appellant using Mr Shepherd (“the upper level contract”). The Appellant had no written contract with Mr Shepherd. There was no issue taken about the interposition of Computer People Limited in the contractual sequence.
4.	The Appellant was incorporated on 10 April 1997 and commenced trading on that day. Mr Shepherd was the sole director and shareholder of the Appellant. Gerling NCM was incorporated on 15 October 1998 with offices in Cardiff and across the world. The UK arm of its business came into operation following the privatisation of a government agency. The business activity of Gerling NCM was the provision of export and domestic credit insurance. The initial contract to provide services to  Gerling NCM ( presumably its predecessor) started  2 February 1998.
5.	The parties were in agreement that for the purposes of the IR35 legislation Mr Shepherd was the worker, the Appellant the intermediary, and Gerling NCM the client.
6.	The substantive issue in dispute was whether Mr Shepherd would have been an employee of Gerling NCM if he had contracted direct with Gerling (NCM) under the hypothetical contract presupposed by the IR35 legislation.  The parties were content for a decision to be made in principle on the substantive issue.
The Evidence
7.	I heard evidence from Mr Shepherd for the Appellant. The Respondents called four witnesses who were:
(1)	Mr Christopher Saunders, HMRC Employer Compliance Officer, who was present at the interviews with Mr Shepherd on 10 October 2002 and 10 December 2004.
(2)	Mr David Lewis, HM Inspector of Taxes, who carried out the investigation into the Appellant’s tax affairs.
(3)	Mr Derek Gigg, Head of Service Delivery Management at Gerling NCM, who was previously a manager responsible for software development at Gerling NCM, and one time manager to whom Mr Shepherd reported.
(4)	Mr Stephen Prentice, Manager IT Services at Gerling NCM, Mr Shepherd nominated Mr Prentice as the person to speak to the Respondents about his working relationship at Gerling NCM.
8.	The parties prepared five bundles of agreed documents which together with additional documents submitted at the hearing were admitted in evidence. Further the parties supplied skeleton arguments and a Respondents’ response together with eight bundles of authorities at the hearing.
9.	The contract documentation included in the bundles consisted of:
(1)	The Upper Level (Computer People Limited & Gerling NCM): copies of contracts extending the terms of assignment covering the period 16 August 1999 to 26 April 2002, and copies of contract SP862 and extension from 27 April 2002 until 25 October 2003. A copy of the first known main contract, SP861, was not available.
(2)	The Lower Level (Computer People Limited & Appellant): copies of contracts extending the terms of assignment of CPL98 covering the period 3 April 2000 to 29 September 2000, copies of an unsigned CPL00 and extensions covering the period 2 October 2000 to 25 April 2002 and a copy of, CPL02 covering the period 25 April 2002 to 25 October 2002, outside the periods under appeal. A copy of the first known main contract, CPL98, was not available
10.	The parties in their submissions referred to the contract documentation under the generic groupings of lower level and upper level.  I adopted the same convention in this decision except when reference was made to a term in a specific contract or contract extension. The Respondents did not take issue with the missing contracts, since there was evidence of contract documentation for the periods under Appeal. There were no significant inconsistencies between the terms of the lower and upper level contracts.

11.	Following the end of the hearing on 23 January 2008 directions were issued requesting further representations on the issue of mutual intention which were received by the due date of 27 February 2008.
Preliminary Issue
12.	On 11 January 2008 the Respondents made an application for directions that the issue to be decided should be restricted to whether IR35 applied in principle during the 2000/01 and 2001/02 tax years. The Respondents objected to the Application pointing out that the directions issued on 15 March 2007 identified the issue to be:
 “whether the services which Mr Shepherd provided to Astradius (formerly Gerling NCM) under a number of separate assignments… to 2005 were caught by the IR35 legislation.”
13.	 On 17 January 2008 I directed that 
(1)	The question for determination is whether the IR35 legislation should apply in principle to the whole of the work undertaken by the Appellant for Gerling NCM for the tax years 2000/01 and 2001/02.
(2)	The parties are entitled to call evidence relating to events and arrangements outside the tax years 2000/01 and 2001/02 provided the evidence is relevant to the disputed issue and no severe prejudice is caused to the other party by the late disclosure of the evidence.
14.	The real dispute between the parties regarding the preliminary issue was whether the Appellant could rely on facts, particularly the tax treatment and business activities of Mr Shepherd outside the tax years in dispute. I considered the dispute was not one of admissibility of evidence but about its weight and relevance which was best assessed by examining it as part of the whole factual context of the Appeal. The Respondents were not prejudiced by the late admission of evidence. Their skeleton argument covered the majority of the points raised by the Appellant. Further they placed some reliance on the fact that Mr Shepherd provided his services to Gerling NCM from 1998 to 2005.
The Legislation
15.	The IR 35 legislation is found in schedule 12 of the Finance Act 2000 (the 2000 Act) for income tax and in regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000 (the 2000 Regulations) for national insurance contributions.
16.	Paragraph 1 of schedule 12 of the 2000 Act provides so far as is relevant: 
'1--(1) This Schedule applies where--
(a) an individual ("the worker") [Mr Shepherd] personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client") [Gerling NCM],
(b) the services are provided not under a contract directly between the client [Gerling NCM] and the worker [Mr Shepherd] but under arrangements involving a third party ("the intermediary") [Alternative Book Club], and
(c) the circumstances are such that, if the services were provided under a contract directly between the client [Gerling NCM] and the worker [Mr Shepherd], the worker would be regarded for income tax purposes as an employee of the client [Gerling NCM]. ...
(4) The circumstances referred to in sub-paragraph (1)(c) 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.'
17.	Regulation 6 of the 2000 Regulations provides so far as is relevant
'6--(1) These Regulations apply where--
(a) an individual ("the worker") [Mr Shepherd] personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client") [Gerling NCM],
(b) the performance of those services by the worker [Mr Shepherd] is carried out, not under a contract directly between the client [Gerling NCM] and the worker [Mr Shepherd], but under arrangements involving an intermediary [Alternative Book Club], and
(c) the circumstances are such that, had the arrangements taken the form of a contract between the worker [Mr Shepherd] and the client [Gerling NCM], the worker [Mr Shepherd] would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner's employment by the client [Gerling NCM].'
Construction of the Legislative Provisions
18.	Park J in Ustech Ltd v Young (Inspector of Taxes) [2004] STC 1671 at page 1686 paragraph 9 said:
“A more general point of construction is worth spelling out at this stage.  The conditions of sub-paragraphs (a) and (b) involve an analysis of the actual facts and legal relationships, but when that analysis shows that those two sub-paragraphs are satisfied sub-paragraph (c) involves an exercise of constructing a hypothetical contract which did not in fact exist, and then enquiring what the consequences would have been if it had existed.  There may be room in some cases for dispute about what the hypothetical contract would contain and in the present case there is”.  
19.	The respective provisions of the 2000 Act and the 2000 Regulations are not identical, in particular  regulation 6 does not contain a provision like paragraph 1(4) of schedule 12 to the Finance Act 2000, expanding on what is covered by 'the circumstances' referred to in sub-paragraph (c) of regulation 6(1).  
20.	The special commissioner in Dragonfly Consultancy Limited v HMRC (2007) Spc00655 at paragraph 32 considered that the potential difference between the 2000 Act and the 2000 Regulations might have an impact on the factual matrix for making the decision under the respective provisions. In his view a decision under the 2000 Regulations may be restricted to considering the arrangements between the parties which in this case would be the lower and upper level contracts. Whereas a decision under the 2000 Act would require a determination of what the hypothetical contract would contain from a consideration of all the circumstances including the formal arrangements between the parties.
21.	Park J in Ustech Ltd v Young (Inspector of Taxes) [2004] STC 1671 at page 1686, paragraph 10 did not consider the potential difference between the 2000 Act and the 2000 Regulations material:
“However, no-one has suggested to me, nor do I consider, that that or the other minor differences between the two statutory provisions affects this case or opens a possibility of the case being decided one way for NICs and another way for income tax and corporation tax”. 
22.	Mr Justice Burton in The Queen and Commissioners of Inland Revenue ex parte Professional Contractors Group Limited and another [2001] EWHC Admin 236 Case Number: CO/2302/00 stated at paragraph 48(iii) that
“It appears to me clear that the Revenue must bear in mind that under IR35 they are not considering an actual contract between the service company and the client but imagining or constructing a notional contract  which does not in fact exist. In those circumstances of course the terms of the contract between the agency and the client as a result of which the service contractor will be present at the site are important, as would be the terms of any contract between the service contractor and the agency.  But particularly given the fact that, at any rate at present, a contract on standard terms may or may not be imposed by an agency, or may be applicable not by reference to a particular assignment, but on an ongoing basis, and may actually bear no relationship to the (non- contractual) interface between the client and the service contractor, such documents can only form a part, albeit an important part, of the picture.”
My Approach
23.	The parties’ submissions took the form of analysing the terms of the lower level and upper level contracts and the wider circumstances against a range of legal principles derived from case law on employment status, in order to arrive at their respective conclusions on whether the hypothetical contract was one of employment or not.  I consider the parties’ approach had the wrong emphasis and carried the risk that the dispute turned into one about employment status rather than on the construction of the hypothetical contract. I adopted an approach of finding facts to determine the terms of the hypothetical contract between Mr Shepherd and Gerling NCM followed by an assessment of the terms and contextual circumstances against case law principles on employment status to decide whether it was a contract of service. I concluded that the adopted approach was consistent with the statutory provisions and the general point of construction made by Park J in Ustech Ltd at page 1686. Further I decided that the different wording in the 2000 Act and the 2000 Regulations was not material.  The factual matrix for decisions under the 2000 Act and the 2000 Regulations was the same, comprising the terms of the lower and upper level contracts and all the circumstances on which Mr Shepherd provided his services to Gerling NCM. 
24.	The structure for the decision starts with the legal principles derived from employment status case law, next the facts, the submissions and my findings followed by a construction of the hypothetical contract and its assessment against the principles. 
The Legal Principles
25.	The IR35 legislation left in place the established case law-based test of employment status. The parties endorsed the general principles established by the leading cases but disagreed on the relevance and the weight to be attached to certain indicators of employment status. The disputed indicators were: the intentions of the parties, whether a substitution clause if existed was a tie-breaker, and whether Mr Shepherd’s circumstances should be considered in the context of service providers in the same kind of business.
26.	In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 the issue was whether a worker was within the class of employed persons under the National Insurance Act 1965 as being an employed person under a contract of service.  MacKenna J said ([1968] 2 QB 497 at 515):
'A contract of service exists if these three conditions are fulfilled.  (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.  (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master.  (iii) The other provisions of the contract are consistent with its being a contract of service.'

27.	MacKenna J added ([1968] 2 QB 497 at 515):
'Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done.'
28.	In Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 Cooke J said that the fundamental test was whether a person performed services as a person in business on his own account.  Although control was relevant it was not the sole determining factor; when one was dealing with a professional man, or a man of some particular skill and experience, there could be no question of the employer telling him how to do the work. 
29.	In Hall (Inspector of Taxes) v Lorimer [1994] STC 23, [1994] 1 WLR 209 the taxpayer was a vision mixer who undertook work for a number of different television production companies and whose engagements consisted of short term contracts lasting one to two days.  In four years he worked on over 800 days.  The Court of Appeal held that there was no single path to a correct decision whether a person was an employee or self employed:
In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person’s work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted by viewing it from a distance and by making an informed, considered qualitative appreciation of the whole. It is matter of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in important from one situation to another.
30.	The Court Of Appeal then went onto identify a non-exhaustive list of relevant factors taken from decided cases about whether a person was employed or self employed. The list included:
(1)	the express or implied rights and duties of the parties;
(2)	the  degree of control exercised over the person doing the work; 
(3)	 whether the person provides his own equipment and the nature of the equipment involved in his work;
(4)	whether the person  hires any staff to help him;
(5)	the degree of financial risk taken by him; 
(6)	the degree of responsibility for investment and management; 
(7)	the opportunity of profiting from sound management of the task.
31.	The Court of Appeal also identified other possible relevant factors including:
(1)	the understanding or intentions of the parties;
(2)	whether a person has set up a business-like organisation of his own;
(3)	the degree of continuity in the relationship between the person performing the services and the person for whom he performs them;
(4)	how many engagements he performs, and whether they are performed mainly for one person or for a number of different people;
(5)	whether the person performing the services is accessory to the business of the person to whom the services are provided or is part and parcel of the latter’s organisation.
32.	My intention is to group the evidence and findings of fact against the indicators of employment and self employment as identified by the above authorities.
The Facts
Established Tax Treatment of Mr Shepherd
33.	Since leaving British Steel in 1978 Mr Shepherd generally provided his services as a self employed person under a partnership with his wife  The last time he was regarded as an employee was in 1985 when he worked for six months for Symon Systems. From 1985 to 1995 Mr Shepherd was engaged as a contractor with the Horserace Totalisator Board (the Tote) developing database systems, in particular a staff selection system. In 1997 Mr Shepherd dissolved the partnership, and offered his services through his company Alternative Book Company Limited.  His first engagement was with St Ivel which lasted six months. In February 1998 Mr Shepherd commenced work at Gerling NCM.  From April 2003 Mr Shepherd supplied his services through a different personal service company, KES Computer Services Limited.
34.	Mr Shepherd considered that working as a self employed contractor enabled him to broaden his expertise in business and computer systems, and the opportunity to meet new people. The disadvantages were the lack of job security, no pension scheme and holiday pay, and having responsibility for self development and running a business.
Continuity of the Relationship with Gerling NCM, Exclusivity of Service and Business on Own Account
35.	Mr Shepherd worked for Gerling NCM full time, averaging around 36 hours per week from February 1998 to April 2004 except for a break of four weeks between 29 June 2001 and 23 July 2001. From April 2004 Mr Shepherd was engaged for 24 hours per week at his request until July 2005. Mr Shepherd’s services were supplied via the Appellant up to 25 April 2003, and then through another personal service company, KES Computer Software Limited.   
36.	 The contractual arrangements for Mr Shepherd’s work at Gerling NCM were a series of term contracts generally ranging from three to six months between the Appellant and Computer People Limited, and between Computer People Limited and Gerling NCM. Mr Shepherd gave evidence that there was no guarantee that Gerling NCM would offer a new contract to the Appellant on expiry of the previous one. There was one occasion in April 2000 when Mr Gigg of Gerling NCM intimated to Mr Shepherd that a new contract would not be offered. However, Mr Gigg was unable to find employees to take on the project work done by Mr Shepherd with the result that the Appellant’s contract was renewed. Further Mr Shepherd on behalf of the Appellant would make a conscious decision about whether to accept a new contract, in particular whether the project would enhance Mr Shepherd’s curriculum vitae. Mr Shepherd, however, accepted in cross examination that the Appellant would not have other work lined up for him on expiry of the contract with Gerling NCM. Mr Shepherd indicated that he would await an offer of a new contract from Gerling NCM before seeking other work.
37.	Mr Shepherd obtained the engagement with Gerling NCM from seeing an advert on the website of Computer People Limited which then arranged an interview for Mr Shepherd with Gerling NCM. At the interview Gerling NCM assessed Mr Shepherd’s technical expertise and interpersonal skills for working in a team not the capacity of the Appellant to supply the right personnel for the position.
38.	The Appellant adduced no evidence of marketing its services or taking active steps to find alternative work for Mr Shepherd during the period of his engagement with Gerling NCM. The Appellant’s accounts for the years ending 31 July 2000, 2001, and 2002 showed that there was no investment or expenditure programme which developed and expanded the business. Computer equipment constituted the sole fixed assets for the business.  The Appellant’s balance sheets for the accounting years of  2000, 2001 and 2002 recorded expenditure on computers at £1,119.00, £340, and £1,255.00.
39.	At various times during the periods of his engagement with Gerling NCM, Mr Shepherd worked on three other assignments. Mr Shepherd supplied ongoing support to the Tote of the systems he created when he worked there between 1985 and 1995.   The time spent by Mr Shepherd, however, on support work for the Tote during his contracts with Gerling NCM was not significant. During the periods under Appeal the time spent on Tote work totalled 29 hours and 58 minutes in 2000/01, and 15 hours and 44 minutes in 2001/02. Around April 2000 Mr Shepherd completed a one-off project with J Patterson & Sons converting data files for which he received a VAT inclusive fee of £2,190.56.  
40.	Finally Mr Shepherd together with a friend developed a computer game named “Pen’em” which tested participants’ skills on dog handling in the context of sheepdog trials. Mr Shepherd stated that he began work on the computer game in May 2002 which was carried on concurrently with his work for Gerling NCM. Mr Shepherd negotiated a reduction in his hours with Gerling NCM from 36 to 24 hours per week from May 2004 in order to concentrate on the computer game. Mr Shepherd used another company, Digi-Game Limited, of which he was sole director and shareholder, to market the game. Mr Shepherd adduced no evidence of the actual time spent on the development of the game.  The game was not brought onto the market until November 2005. Digi-Game Limited did not trade in 2004. The published accounts for Digi-Game Limited ending 31 October 2005 revealed income of £850 and administration expenses of £420. Mr Shepherd did not receive a salary from Digi-Game. 
41.	  The Appellant’s turnover for the period 6 April 2000 to 5 April 2002 was an estimated £180,549 gross of VAT, of which the “non-Gerling” work accounted for £6,803 gross of VAT.
42.	At the hearing there was a dispute between Mr Shepherd and the representatives of Gerling NCM about whether he was permitted to take phone calls at the Cardiff premises of Gerling NCM from the Tote in respect of the support contract. Mr Gigg stated that Mr Shepherd’s contract would have been terminated if he was found to be doing work for another organisation whilst working at Gerling’s premises. The analysis of Mr Shepherd’s timetable of work done for the Tote revealed that he received a total of 21 telephone calls over a period of two years (2000 -2002). Mr Shepherd confirmed that he did his work for the Tote from home.
43.	 Clause 14 of the Terms and Conditions of the contract CPL00 (October 2000 to April 2002) between the Appellant and Computer People, restricted the Appellant from accepting any other contract which might have created a conflict of interest with the services performed for Gerling NCM.   Under Clause 3.5 of CPL00, the Appellant gave a warranty that it was not prevented by any other contract or agreement from fulfilling its obligations under the agreement. 
Mutual Intention
44.	Mr Gigg stated that he would prefer to take on employees but it was company policy to engage contractors to work on projects because of budgetary restrictions and limits on headcount. Mr Prentice explained that the engagement of contractors gave Gerling NCM flexibility, in that their contracts could be terminated at short notice if the workload fell. Further there were no overheads of employee indirect costs attached to contractors. The fees, however, paid to contractors were twice the annual salary of a member of staff doing equivalent work.
45.	 The lower and upper level contracts contained a clause to the effect that the respective agreements did not constitute an employment relationship between the parties. Under the contracts Mr Shepherd had no entitlement to holiday or sickness payments and ineligible to join the pension scheme of Gerling NCM. The Appellant under the low level contract was responsible for PAYE, income tax, corporation tax, national insurance contributions and VAT payments on the fees received.
46.	Under the upper level contract the fee rate for Mr Shepherd’s services was expressed as a weekly rate for 36 hours. Overtime was calculated on a pro-rata basis. The fee in the lower level contract was altered to an hourly rate from the 8 May 2002. 
47.	Payment of the fee by Gerling NCM would occur on the presentation of an invoice from Computer People Limited. The payment from Computer People Limited to the Appellant was by bank transfer. The Appellant was required to provide Computer People Limited with a record of the work done for Gerling NCM. 
48.	A period of four weeks written notice was required to terminate both sets of contracts. The contracts did permit termination with immediate effect on the occurrence of specific events. 
Mutuality of Obligation and Hours Worked
49.	Under the lower level contract the Appellant provided services to Gerling NCM in consideration of a payment of fee. The person supplying the service was Mr Shepherd. In the upper level contract Computer People Limited assigned Mr Shepherd to provide consultancy services to Gerling NCM for a fee. The contracts could not be terminated without notice if there was no work for Mr Shepherd except in the case of Force Majeure. Computer People Limited advised Gerling NCM in the upper level contract to give advance warning if it wished to extend the services of Mr Shepherd.
50.	The summary of Mr Shepherd’s time sheets for the tax years 2000/2001 and 2001/2002 revealed that he worked for Gerling NCM for a total of 3,666.85 hours which averaged out at 35.25 hours each week.
Personal Service
51.	The upper level contract named Mr Shepherd as the consultant whose services were being hired. No mention was made of the Appellant in the upper level contract until 27 April 2002. The lower level contract identified Mr Shepherd as a consultant or personnel.  
52.	Mr Prentice confirmed that Mr Shepherd would have been tested at interview on his expertise and skills. Mr Shepherd’s appointment as a contractor would have been on the basis of his suitability to do the work. Gerling NCM was not interested in the Appellant or its capacity to provide the services required. Mr Prentice doubted whether the existence of the Appellant would have been mentioned at interview. Mr Shepherd offered expertise in Oracle database and PsQuel, Cobal and Visual Basic 6 programme languages. Mr Gigg, however, did not consider that the particular skills offered by Mr Shepherd were in short supply. 
53.	The lower and upper level contracts commencing 3 April 2000 did not contain a substitution clause permitting the Appellant to supply the services through a consultant other than Mr Shepherd. From 2 October 2000 the contracts included the following clause:
•	The Appellant must give 14 days written notice for replacement of personnel.
•	The original personnel’s absence must not interfere with the performance of the specification or with any agreed timeframe.
•	Gerling NCM has the right to refuse the personnel on any reasonable grounds.
54.	Mr Shepherd produced a statement from Mr Gigg dated 16 February 2005 which stated that
The following confirms the contractual arrangements between Gerling NCM (Client) and Alternative Book Company Limited (Contractor):
•	The services are to be supplied by Keith Shepherd on behalf of the Contractor.
•	The Contractor has the right to replace Keith Shepherd with a substitute who will carry out the services as specified in the contract.
•	If the Contractor provides a substitute who has the necessary skills to carry out the services specified in the contract, the Client agrees to accept that substitute.
•	The Contractor remains responsible for the payment of, and the work done by the substitute.  
55.	Mr Gigg in his evidence distanced himself from the above statement. Mr Gigg testified that the words in the statement were not his. Further he told Mr Shepherd that there would be no circumstances under which he would accept a substitute. Mr Gigg, acknowledged in cross-examination that a Mr D might have been a suitable substitute. Mr D, however, was not a realistic possibility because he was already working for Gerling NCM as an independent contractor and about to retire.  In February 2005 several contractors were asking Mr Gigg to sign similar worded statements as a way of getting round the IR35 legislation.
56.	PriceWaterhouseCoopers in their capacity as Gerling’s representatives, wrote to the Respondents on 6 July 2005 saying that Gerling NCM would consider a substitute if one was offered by the Appellant but would assess the substitute and his capabilities. Gerling’s acceptance or rejection of the substitute would depend upon his capabilities. To date no substitute has been offered by the Appellant. Mr Gigg indicated that a substitute would be subjected to the same recruitment process as experienced by Mr Shepherd when appointed as a consultant. 
57.	When interviewed on 10 October 2002 Mr Shepherd told the Respondents that the substitution clause had been inserted into the assignments as its omission would have been a stronger pointer towards the work falling within ‘IR35’. Further in practice Gerling NCM would either tolerate his absence and he would continue with the contract, or Gerling NCM would terminate his contract and find someone else. 
58.	The Appellant never sent a substitute for Mr Shepherd during his seven years with Gerling NCM. Also the Appellant did not have the capacity to provide a substitute since Mr Shepherd was its sole employee. 
Control
59.	The lower level contract that ran from 2 October 2000 to 26 April 2002 stated that the Appellant and Mr Shepherd  would:
“devote such time, attention, skill and ability as is necessary to attain a high standard of performance of the service in accordance with the requirements of the client [Gerling NCM] at the location or at such location as the client may reasonably require”.
60.	The terms and conditions of the upper level contract with effect from 27 April 2002 defined personnel as the person employed by the Appellant to provide the IT services required by Gerling NCM.
61.	The lower and higher level contracts for the 6 month period commencing 3 April 2000 contained no details of the services supplied by the Appellant and Mr Shepherd.   The subsequent contracts from October 2000 had the same generic description of the services to be provided by the Appellant which was:
“As agreed between the Gerling NCM and the Appellant services shall include quality initiative projects and associated mini projects”. 
62.	Mr Shepherd gave evidence that each contract with Gerling NCM was for work on a discrete individual project. Mr Prentice, however, indicated that if Gerling’s priorities changed Mr Shepherd would have been assigned to other projects. Mr Shepherd did not agree with Mr Prentice’s understanding of the contract. Mr Shepherd insisted that he had the right to say no to working on another project. Mr Shepherd, however, gave a different account during his interview on 10 October 2002 when he acknowledged that if he had been unable to continue with his project for any reason, he would be transferred to another project and not left idle, which happened on one occasion when he did some programming to help out another team.  
63.	Mr Shepherd gave the impression in his evidence that he had considerable freedom in how he carried out his work. He would use his skills and experience to determine the method and manner of performing the services. He worked mostly on his own. Mr Shepherd’s interview in October 2002 provided a different insight of how he performed his duties.  Mr Shepherd stated that whilst working on a project he was given timescales to solve specific problems.  The project manager allocated the task, with Mr Shepherd reporting to him on progress. Mr Prentice confirmed that Mr Shepherd was required to make frequent informal progress reports and a formal report every month to the project manager. The Quality Assurance Team would carry out testing and acceptance checks on Mr Shepherd’s work. He would be expected to rectify his errors.  Further Mr Shepherd could be over-ruled by a full time senior member of staff, and that Gerling NCM would have the final say on Mr Shepherd’s standard of work. Mr Shepherd accepted that he could be overruled, although this never happened. 
64.	According to Mr Prentice, Mr Shepherd did not work on his own. On the Puma project he worked with one other worker, otherwise he worked as part of a team. Mr Prentice pointed out that Gerling NCM did not supervise work in the traditional sense of overseeing every aspect. Gerling NCM was only interested in delivering schedules on time. The control mechanisms of reporting and quality assurance applied to all persons working in the organisation whether contractors or members of staff.
65.	Mr Shepherd performed his services at the offices of Gerling NCM at Cardiff. This location was stipulated by Gerling NCM in the lower and upper level contracts.    The specified location arose from the necessity to work on the mainframe computer of Gerling NCM. Mr Shepherd estimated that he spent four hours a week at home on tasks for Gerling NCM. Mr Shepherd, however, accepted at his interview on 12 October 2002 that home working was done out of choice, in order to demonstrate his commitment to the job which would make it more likely that his services would be retained when the contract came up for renewal.
66.	Mr Shepherd in evidence stated that he was able to work at any time at his discretion provided the pre-agreed delivery dates for the projects were met. He disagreed with the evidence of Messrs Gigg and  Prentice that he was expected to be at work during the core hours of 9:30am to 11:30am, and 2:00pm to 3:30pm. An examination of Mr Shepherd’s time sheets for tax year 2000/01 showed that there were only 13 occasions when Mr Shepherd was not working during the core hours. The majority of the 13 occasions involved Mr Shepherd starting slightly later than 9.30am. Mr Prentice accepted that Mr Shepherd could choose his own start and finish times outside the core hours. However, this was no different from that which applied to employees under the flexible working staff policy. 
67.	Under the lower and upper level contracts Mr Shepherd was required to do 36 hours per week. The summary of Mr Shepherd’s time sheets showed that he rarely worked a flat 36 hours, generally he worked around 40 hours per week. However when his hours were averaged out over the two tax years in dispute it produced a figure of 35.25 hours per week. Mr Gigg acknowledged that contractors sometimes worked more or less hours than they were contracted to do.  However, if he discovered that a contractor was taking advantage of the situation, he would instruct the contractor to fall back into line. Mr Gigg had not warned Mr Shepherd  over his time-keeping. 
68.	Mr Shepherd completed a weekly time-sheet of hours worked, which required authorisation by Gerling NCM. Employees likewise completed time sheets but with different codes for the staff flexi-hour system. According to Mr Gigg, Mr Shepherd would need permission to work hours in excess of the contracted hours or at the weekends.
69.	 Mr Shepherd denied that he needed permission from Gerling NCM for absences or leave.  The lower level contract from October 2000 to April 2002, however, included a term requiring Mr Shepherd to seek permission from Gerling NCM for any absence. The contract extension commencing on 1 January 2001 showed that a one week holiday was agreed in advance for the period 25 June 2001 to 29 June 2001. Mr Prentice said that work was planned in advance to take account of any known absences.  Mr Gigg stated that if a contractor asked for time off to complete work for another organisation then, so long as the absence did not affect any Gerling deadlines, then the request would be granted. 
Provision of Equipment
70.	Gerling NCM provided Mr Shepherd with a computer terminal, desk, chair and phone on its premises. Mr Shepherd accepted that Gerling NCM provided him with the equipment to do the job. Mr Prentice on behalf of Gerling NCM accepted that Mr Shepherd was allowed to work from home out of choice. This happened relatively infrequently and was not a feature of the engagement. 
Financial Risk 
71.	Mr Shepherd was paid hourly and his earnings were fixed during the duration of each contract.  The only way he increased his income from the assignment with Gerling NCM was to do extra hours or work at weekend which were paid at the same hourly rate and required  prior authorisation from Gerling NCM. Mr Shepherd was engaged to perform a particular service. He was not remunerated on a project or fixed fee basis. The Appellant and Mr Shepherd did not invest capital in the project. The payments under the contract were guaranteed on production of time sheets and made at regular pre-defined intervals under the terms of the lower and upper level contracts. Mr Prentice said that Mr Shepherd would be paid for rectifying errors in his work.  Mr Shepherd acknowledged that there was no question of him rectifying mistakes in his own time 
72.	Under Clause 4 of the lower level contract (2 Oct 00 – 26 April 2002) the Appellant agreed to indemnify Computer People Limited  for any financial loss arising out of or in connection with any act or omission of Mr Shepherd.   
73.	The lower level and upper level contracts gave Mr Shepherd no job security, no entitlement to redundancy and no legal recourse in the event of unfair dismissal. He was required to provide his own training so that he could maintain his skills in a competitive environment.  Mr Shepherd took financial risks with the development of the computer game, “Pen’em”, which eventually was a loss making enterprise.
74.	Mr Shepherd reduced his overheads by working from home and working the whole day when at the Cardiff premises. Mr Shepherd accepted that the terms of the assignment with Gerling NBC provided limited scope for efficiency savings.
 Part and Parcel
75.	Mr Shepherd stated that he worked largely on his own and that he would liaise occasionally with employees of Gerling NCM. In contrast Mr Prentice asserted that Mr Shepherd worked as part of a mixed team of employees and contractors. According to Mr Prentice, Mr Shepherd was the team leader for a particular project, although as team leader he did not have responsibilities for the personnel management of team members. Mr Shepherd disputed that he was ever a team leader at Gerling NCM.  
76.	Mr Prentice stated that Mr Shepherd would be required to make progress reports to project managers. The contents of Mr Shepherd’s interview on 10 October 2002 corroborated aspects of Mr Prentice’s evidence regarding reporting arrangements.  
77.	Mr Shepherd was given a security pass with his photograph to gain access to the Cardiff premises of Gerling NCM.  He was expected to observe the Staff Code of Conduct. Mr Prentice stated that an information pack about the work practices of Gerling NCM would have been given to Mr Shepherd on appointment but Mr Prentice could not recall giving a pack personally to Mr Shepherd. 
78.	Mr Gigg considered that Mr Shepherd became part of the scenery at Gerling NCM. Mr Shepherd was invited to the company’s Christmas dinner, which he declined. He took part in five a side football matches, which were informal social events organised by the participants rather than the company. 
79.	Mr Shepherd was not included in the staff appraisal scheme and had no career path within Gerling NCM.
The Submissions
The Appellant
80.	Counsel contended that a hypothetical contract between Mr Shepherd and Gerling NCM would have included a substitution clause, in which case there was no requirement for Mr Shepherd to perform the services personally to Gerling NCM.  Counsel submitted if that was the case the hypothetical contract would not as a matter of law constitute a contract of employment. 
81.	As authority for his proposition Counsel cited the Court of Appeal decision in Express & Echo Publications Ltd v Tanton I.C.R. [1999] 693. The case primarily turned upon a substitution clause (3.3) in an agreement for services which stated  that if  
“the driver  was unable or unwilling to perform the services personally he shall arrange at his own expense  entirely for another suitable person to perform the services” 
82.	Lord Justice Gibson at page 698 found that
“ ….in my judgment, it is plain from clause 3.3 that the applicant, as a matter of contract, was not obliged to perform any services personally himself if he was unwilling or unable to do so, provided that he could find a substitute driver”.
“ In those circumstances, it is, in my judgment, established on the authorities that, where, as here, a person who works for another is not required to perform his services personally, then as a matter of law the relationship between the worker and the person for whom he works is not that of employee and employer”.
83.	If his submission about the tie breaker nature of the substitution clause did not find favour, counsel contended that the facts of Mr Shepherd’s engagement with Gerling  NCM should be evaluated against the case law principles on employment status in the context of other “service providers” in the same kind of business. Thus as an example the fact that Mr Shepherd only made a modest investment in capital assets for his business was not necessarily a factor pointing towards employment. A computer software consultant in business was principally selling his IT skills which did not require the same capital investment as a road haulier running his business.  
84.	Counsel considered that the established tax treatment of Mr Shepherd as a self-employed person was significant when determining whether the work carried out for Gerling NCM was under a contract for services. Barnett v Brabyn 69 TC 133 decided that established tax treatment as self-employed was a cogent factor pointing to a contract for services. Similarly the fact that Mr Shepherd was in business on his own account carrying out other work at the same time as supplying his services to Gerling NCM was a strong indication that the hypothetical contract would not be one of employment.  Cooke J in Market Investigations at page 185B said :
“The application of the general test may be easier in a case where the person
who engages himself to perform the services does so in the course of an
already established business of his own; but this factor is not decisive, and a
person who engages himself to perform services for another may well be an
independent contractor even though he has not entered into the contract in
the course of an existing business carried on by him”

85.	Counsel pointed to the evidence of Messrs Gigg and Prentice that Gerling NCM did not want an employment relationship with Mr Shepherd. They wanted a contractor with no strings attached. Equally Mr Shepherd was prepared to take the attendant risks of a self employed contractor in return for a fee which was roughly twice the hourly rate enjoyed by employees. Counsel submitted that the stated mutual intentions of the parties were highly relevant in determining the status of the hypothetical contract between Gerling NCM and Mr Shepherd. Counsel disagreed with the Respondents’ view that mutual intention was not relevant when construing a hypothetical contract. Hall v Lorimer cited mutual intention as a potential factor for deciding employment status. The High Court in Professional Contractors Group Limited confirmed that the case law principles on employment status applied to the IR35 legislation. Counsel cited two special commissioners’ decisions Battersby v Cambell [2001] STC 189 and FS Consulting v McCaul [2002] STC 138 where evidence of mutual intention had been taken into account in cases involving IR35 determinations. Essentially Counsel submitted that mutual intention was relevant to an IR35 analysis, the precise weight to be attached to it, however, was a matter for the fact finding tribunal. 
86.	Counsel considered that Mr Shepherd could exercise considerable discretion in how and when he performed his services for Gerling NCM. Mr Shepherd was only paid for work done and did not have the job security and benefits enjoyed by employees. 
87.	The facts which pointed towards employment, such as provision of equipment by Gerling NCM, the place of work and the notice period of four weeks in the lower and upper level contracts were not significant. Counsel concluded that when all the facts were considered in the context of a business of a computer software consultant, the hypothetical contract between Mr Shepherd and Gerling NCM would have been a contract for services.
The Respondents
88.	The Respondents contended that the minimum obligation necessary for a contract of service was the obligation on the part of the engager to pay the worker remuneration and for the worker to provide his services in consideration of that remuneration (Nethermere v Taverna and Gardiner [1984] IRLR 240). In this Appeal the Respondents submitted that the question of mutuality of obligation posed no difficulty. The evidence clearly demonstrated that Mr Shepherd would have provided services in return for remuneration under the terms of a hypothetical contract between Gerling NCM and Mr Shepherd. 
89.	The Respondents considered that the evidence showed that the personal service of Mr Shepherd was required by Gerling NCM and that in reality the replacement of Mr Shepherd by a substitute would not have been practical. At the highest the substitution clause in the lower and upper contracts was merely a right to propose a replacement in which case it was not a tie breaker but simply one fact among others in assessing the weight to be given to it, when deciding the status of the hypothetical contract (Synaptek Ltd v Young [2003] STC 543). 
90.	According to the Respondents the work undertaken by Mr Shepherd for the Tote during the contract with Gerling NCM was insufficient to satisfy business on own account. The income received from the Tote venture was small in comparison with that received from Gerling NCM. In any event the existence of the Tote venture did not preclude Mr Shepherd from being an employee of Gerling NCM under a hypothetical contract. 
91.	The Respondents submitted that no weight should be attached to Mr Shepherd’s activities developing the computer game “Pen’em”. These activities were not those of the Appellant but of Mr Shepherd’s other personal service companies. Further the activities occurred outside the period under investigation. The legislation required the Tribunal to consider the nature of the Appellant’s arrangements with Gerling NCM during the period of the Appeal. The computer game was not part of those arrangements.
92.	The Respondents argued that the intention of the parties was not a relevant consideration for determining the status of a hypothetical contract under the IR35 legislation. In employment status cases the Respondents contended that the intentions of the parties were only pertinent in borderline cases when the status of the work relationship was ambiguous. Lord Denning  in Massey v Crown Life Insurance Co [1978] IRLR 31 at page 33 said:
 “The law as I see it is this: If the true relationship of the parties is that of master and servant under a contract of services, the parties cannot alter the truth of that relationship by putting a different label upon it …..On the other hand, if their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true relationship between them”.
93.	According to the Respondents in an employment status case situation a direct relationship existed between the engager and the worker, and in those circumstances it was possible to arrive at a conclusion about whether the parties intended to create a contract of service or a contract for services. On the other hand, an IR35 situation comprised a three party arrangement where the contracting parties’ intentions would always be to contract on a self employed basis.  Thus the construction of the hypothetical contract would start with the premise that the parties intended it to be a contract for services which from the Respondents’ point of view was not a tenable position and would undermine the purpose of the IR35 legislation. In their view the special commissioners in Netherlane Limited (2005) SPC00457 and Dragonfly were right in their findings that it was not possible for the parties to have any intention over a hypothetical contract. Finally the Respondents commented that in this Appeal it may have been the parties’ intentions not to enter into an employment relationship but it was apparent from the evidence that Gerling NCM wanted Mr Shepherd to provide services under arrangements akin to those which applied to its employees.
94.	The Respondents contended that the degree of control exercised by Gerling NCM over Mr Shepherd was sufficient to be consistent with a contract of service in a hypothetical relationship. The absence of financial risk, the provision of equipment, and the four weeks notice of termination were all pointers towards employment. Further the evidence indicated that Mr Shepherd had become an integral part of the Gerling organisation.
95.	The Respondents concluded that the picture painted by the facts of this Appeal was one of a contract of service rather than a contract for services.  
Findings of Fact
96.	 I find under mutuality of obligation that Mr Shepherd was required to perform services to complete IT projects for which Gerling NCM was obliged to pay a fee. I am satisfied that under the arrangements and circumstances of the engagement Gerling NCM was also obliged to provide work for Mr Shepherd. The indications to the contrary were that Gerling NCM would only pay for the hours worked, and no specific term in the lower and upper level contracts requiring Gerling NCM to make work available.  I consider  those contrary indications were outweighed by:
(1)	 The termination provisions in the contracts, Gerling NCM could not finish the contract on the grounds of no work without giving four weeks notice. 
(2)	The periods of the contract which were relatively short and aligned to the duration of specific projects.
(3)	 The clear expectation on the face of the contracts that Gerling NCM would supply 36 hours of work per week. 
(4)	  The fact that Mr Shepherd did work on average 35.25 hours per week throughout the two tax years under Appeal, which included weeks when Mr Shepherd chose to take a holiday.
97.	There was a clear conflict between Mr Shepherd’s evidence and that of Messrs Gigg and Prentice in respect of control. I preferred the evidence of Messrs Gigg and  Prentice which was consistent with the terms of  the lower and upper level contracts. Also the contents of Mr Shepherd’s interview on 10 October 2002 were more in line with the accounts given by Messrs Gigg and Prentice than with his evidence in chief given before me. I find on the issue of control:
(1)	The what: Gerling NCM assigned Mr Shepherd to specific IT projects in accordance with its priorities. Within a project Mr Shepherd was allocated certain tasks to do. Gerling NCM retained the right to move Mr Shepherd to other projects which happened on one occasion. I was not convinced by Mr Shepherd’s evidence that he would only accept a contract if the project met his needs. The tenor of Mr Shepherd’s evidence was that he was keen to show commitment to guarantee the renewal of the contract with Gerling NCM. Further he took no steps to find alternative work but  awaited the offer of a new contract. His evidence suggested that he would accept whatever the work given to him by Gerling NCM. 
(2)	The how: Mr Shepherd was not subjected to daily supervision by a line manager. Mr Prentice for Gerling NCM was focussed on delivering projects on time to the correct quality standard, which were achieved by  project team members reporting regularly on progress and subjecting outcomes to quality assurance processes. Mr Shepherd was obliged to report regularly on progress and provide the project manager with formal reports monthly. The quality of his work was assessed by the quality assurance team. The controls of reporting and quality assurance exercised over Mr Shepherd’s work were the same as those applied to Gerling’s employees working on IT projects. Finally I am satisfied that Mr Shepherd worked as a member of team not generally on his own.
(3)	The where: Mr Shepherd accepted that he was required to attend the offices of Gerling NCM in Cardiff to perform his services. The work done from home was minimal and generally out of choice.
(4)	The when:  I am satisfied from the evidence that Mr Shepherd did not have freedom to choose his hours of work and take leave without prior authorisation.  I find that Mr Shepherd could choose his start and finish times provided he was in attendance during the core hours. This was the same arrangement given to members of staff working flexi-time. Mr Shepherd required prior authorisation to take leave as was clear from the contract documentation and the evidence of Messrs Gigg and  Prentice.
98.	The Appellant’s submission that Gerling NCM did not require Mr Shepherd to perform the contracted services personally relied upon the substitution clause in the contracts which was added in October 2000, and the existence of no right under the contracts to sue Mr Shepherd for non-performance.  I find that the Appellant’s submission was without substance, and that Gerling NCM had effectively contracted with Mr Shepherd to perform the required services. I reach that conclusion for the following reasons:
(1)	The upper level contracts specified Mr Shepherd as the consultant supplying the services. The Appellant was not identified in the upper level contracts until 27 April 2002. The lower level contracts also named Mr Shepherd as the consultant. 
(2)	Gerling NCM recruited Mr Shepherd directly for his IT expertise. Gerling NCM interviewed Mr Shepherd as an individual not in his capacity as a director of a service company. 
(3)	The substitution clause added to the contracts from 2 October 2000 did not give the Appellant an unfettered right to provide a substitute in place of Mr Shepherd. Gerling NCM was entitled to refuse the substitute offered on any reasonable grounds. I placed no weight on the joint statement of Mr Gigg and Mr Shepherd dated 16 February 2005 which indicated that Gerling NCM would accept a substitute with the necessary skills. I accepted Mr Gigg’s explanation that the words used in the statement were not his, and that any substitute offered would have to go through the same recruitment process as applied to Mr Shepherd. Mr Shepherd admitted in his interview on 10 October 2002 that the substitution clause was of no practical effect: Gerling NCM would either tolerate his absence allowing him to continue with the contract, or would terminate his contract and find someone else. In the same interview Mr Shepherd accepted that the substitution clause was inserted to meet any potential IR35 challenge. Further the facts showed Mr Shepherd performed the services throughout the seven years he worked for Gerling NCM.  The Appellant offered no substitute during the seven years, which in any event would not have been possible because Mr Shepherd was its sole employee. I attach no weight to the example given of Mr D, which was hypothetical since Mr D was retiring. Overall I conclude that the substitution clause was window dressing, and that Gerling NCM would have replaced Mr Shepherd if he was unable to carry out the work.
(4)	The substitution clause at its highest was no more than a right to nominate another person in the event of Mr Shepherd being unable to perform his duties. However, on the facts found I consider that if Gerling NCM had been contracting directly with Mr Shepherd it would not have agreed to a substitution clause. This conclusion was supported by the fact that the contracts up to October 2000 did not include a substitution clause. 
(5)	Although there was no right to sue Mr Shepherd for non-performance, the lower level contract could be terminated without notice if Gerling NCM considered Mr Shepherd to be technically incompetent.
  
99.	Whilst under contract with Gerling NCM I am satisfied that Mr Shepherd was required to provide his services exclusively during the hours worked. I accept the evidence of Mr Gigg that Mr Shepherd’s contract would have been terminated if he had been carrying out external assignments without consent, whilst working for Gerling NCM. I have no reason to doubt Mr Shepherd’s evidence that he received phone calls from the Tote at the Cardiff offices of Gerling NCM.  However the number of phone calls taken was infrequent, 21 over two years with the longest being 22 minutes, and probably not noticed by Mr Gigg or Mr Prentice. Further Mr Shepherd actually did the work for the Tote in his own time at home, which suggested that Mr Shepherd accepted that he should not be doing other work when at the Cardiff premises. 
100.	 I find no compelling evidence that the Mr Shepherd was in business on his own account during his engagement with Gerling NCM. He worked for Gerling NCM for a period of seven years albeit under a series of fixed term contracts. During that time he effectively had only one other engagement which was with the Tote. The time spent on work for the Tote was minimal in the disputed years averaging out at less than 30 minutes per week during 2000/01 and 2001/02. Further the Tote was not new work gained whilst working for Gerling NCM but a long-standing arrangement stemming from an assignment completed in 1995. The Appellant and Mr Shepherd did not market their services or seek other assignments. Mr Shepherd was content to await the offer of another contract by Gerling NCM. The Appellant cited Mr Shepherd’s development of the computer game, “Pen’em” to demonstrate that he was in business on his own account. The facts showed that the game was not marketed until 2005, no development work was undertaken during the disputed years. The scale of the enterprise was modest realising a turnover of £850 for the year ending 31 October 2005.  I placed no weight on the evidence of “Pen’em”.  The evidence was too remote from the tax years under Appeal and was not part of the arrangements under investigation since it did not involve the Appellant. Finally the modest scale of the enterprise had the hallmarks of a personal project rather than a business.
101.	I find that Mr Shepherd was integrated within the IT department of Gerling NCM. He worked there for seven years, doing on average 36 hours a week until April 2004. Mr Shepherd worked generally as a member of team, which included employees. As with other members of staff working on IT projects, he was required to make progress reports and submit his work to the quality assurance team. I consider that Mr Gigg’s statement that Mr Shepherd was part of the scenery was an accurate description of Mr Shepherd’s relationship with Gerling NCM.
102.	 I find that the lower and upper level contracts specified that the agreements did not constitute or imply an employment relationship between the parties. Mr Prentice explained that Gerling NCM engaged contractors to comply with agreed staff establishment levels and to provide flexibility in the event of a downturn in business. Mr Shepherd sought engagement as a consultant rather than as an employee. The insertion of this clause in the hypothetical contract, however, would not be decisive about the nature of the working relationship between Mr Shepherd and Gerling NCM. The effect of the clause has to be considered in the context of the contract as a whole.
103.	There was no substantive dispute between the parties on the facts regarding established tax treatment, provision of equipment, and financial risk. They, however, disagreed about their significance for deciding whether the hypothetical contract between Mr Shepherd and Gerling NCM was a contract for services or a contract of service, which I will deal with when I consider the hypothetical contract.  I formally make the following findings:
(1)	Mr Shepherd had an established record of paying tax as a self employed person.
(2)	Gerling NCM provided Mr Shepherd with the equipment necessary to do the job.
(3)	Mr Shepherd was not exposed to significant financial risk with his engagement with Gerling NCM. He was remunerated on a fixed fee basis and had no capital invested in the assignment. Mr Shepherd, however, did not have job security or the benefit of sickness pay. There was a possibility that his contract would not be renewed, although on the evidence Mr Shepherd expected it to be renewed as he would await the offer of a new contract before looking for other work.

The Hypothetical Contract
104.	Under the legislation I am required to construct a hypothetical contract between Gerling NCM and Mr Shepherd for the tax years in question from my findings on the arrangements and wider circumstances and decide whether the terms of the contract as a whole in the contextual circumstances constituted a contract for services or a contract of service.
105.	I find that the hypothetical contract would contain the following terms:
(1)	During the period of the hypothetical contract there would be several fixed term contracts typically ranging from three to six months. The contract would have a clause requiring Gerling NCM to give notice whether it intended to renew the contract on the same or similar terms.
(2)	 A requirement for Mr Shepherd to provide personally the services of an IT specialist 
(3)	Mr Shepherd would be assigned by Gerling NCM to quality initiative projects and associated mini projects.
(4)	A requirement on Mr Shepherd to report on progress to the project manager at regular intervals and subject finished work to testing by the quality assurance team.
(5)	The place of work would be at the Cardiff offices of Gerling NCM with a provision to work occasionally from home with prior agreement of the project manager
(6)	The hours would be 36 hours per week Monday to Friday with a requirement to work the core hours of 9:30 am to 11:30am and 2:00pm to 3:30pm. Mr Shepherd would have a discretion on start and finish times outside the core hours.
(7)	 The fee for the work would be expressed at an hourly rate with the figure for 36 hours. The fee would be payable weekly in arrears by bank transfer and on production of an authorised completed time sheet for the week. 
(8)	The hourly fee rate would be significantly higher than a permanent employee in a similar position.
(9)	Overtime and working at weekends would require specific authorisation of the project manager. The fee rate for overtime and weekend working would be at the same rate as for the 36 hours.
(10)	Any leave taken during the term of the contract would require prior authorisation of the project manager.
(11)	An obligation on Mr Shepherd to inform the project manager of his inability to attend work through illness or other exceptional reason.
(12)	The equipment necessary to do the job would be provided by Gerling NCM.
(13)	A term prohibiting Mr Shepherd from taking on other work during the term of the contract except with the consent of Gerling NCM. The consent could not be unreasonably withheld.
(14)	Written notice of 4 weeks from either party would be required to terminate the contract early. There would be a residual clause permitting Gerling NCM to terminate the contract unilaterally in defined exceptional circumstances.
(15)	No entitlement to paid leave or sickness benefit.
(16)	Not eligible to be a member of the pension scheme.
(17)	A clause to the effect that the parties did not intend to create an employment relationship
106.	 Before deciding whether the terms of the hypothetical contract would constitute a contract of service or a contract for services I wish to deal with the three specific points raised by Appellant’s counsel namely: substitution clause; mutual intentions, and evaluating the contract in context of service providers in the same line of business.  
107.	Appellant’s counsel submitted that the existence of substitution clause was a tie breaker in that if it existed the contract could not be an employment one. However, as Park J found in Usetech after reviewing the authorities starting with Tanton it was necessary first to determine as fact the precise effect and nature of the substitution clause, and only then would it be possible to decide whether the clause was a tie-breaker or fact amongst others. Park J  stated at 1699 paragraph 53:
“As it seems to me the present state of the law is that whether a relationship is an employment or not requires an evaluation of all of the circumstances.  In the words of Hart J in Synaptek Ltd v Young [2003] STC 543, 75 TC 51, paragraph  12, the context is one 'where the answer to be given depends on the relative weight to  be given to a number of potentially conflicting indicia'.  The presence of a substitution clause is an indicium which points towards self-employment, and if the clause is as far-reaching as the one in Tanton it may be determinative by itself.  In this case, however, if, contrary to my view, the hypothetical direct contract between Mr Hood and ABB has to be assumed to have contained a substitution clause similar to that in the Usetech/NES contract, in my opinion (agreeing with the Special Commissioner) it would not be sufficient to override the effect of all the other considerations which led the Commissioner to decide that the relationship would have been that of employee and employer.
108.	In this Appeal I found as fact that the substitution clause in the lower and upper level contracts was at its highest no more than a right to nominate another worker, and certainly did not have the far reaching characteristics of the clause considered by the Court of Appeal in Tanton. However, I have gone one step further in that I hold on the facts found that no substitution clause would be included in a hypothetical contract between Mr Shepherd and Gerling NCM. I found that the substitution clause in the lower and upper level contracts was window dressing and had no practical effect on how the contract would operate. I consider that if Gerling NCM had negotiated the contract with Mr Shepherd direct it would not have agreed to a substitution clause because Gerling NCM was only interested in the skills and personal services of Mr Shepherd. 
109.	I consider on a correct construction of the IR35 legislative provisions that I am entitled to conclude from the wider circumstances that the hypothetical contract would not include a substitution clause even though it appeared in both the lower and upper level contracts. Park J in Usetech decided after consideration of the all circumstances to exclude the substitution clause from the hypothetical contract. His rationale for so doing was based on the observations of Burton J in R (on the application of Professional Contractors Group Ltd) v IRC [2001] EWHC Admin 236, [2001] STC 629, 74 TC 393, paragraph 48:
“In those circumstances, of course the terms of any contract between the agency and the client as a result of which the service contractor will be present at the site are important, as would be the terms of any contract between the service contractor and the agency.  But, particularly given the fact that, at any rate at present, a contract on standard terms may or may not be imposed by an agency, or may be applicable not by reference to a particular assignment, but on an ongoing basis, and may actually bear no relationship to the (non-contractual) interface between the client and the service contractor, such documents can only form a part, albeit obviously an important part, of the picture.”
110.	There may be an argument that the circumstances of the non-contractual interface is only relevant when there is a conflict between the lower and upper level contracts which was the case in Usetech Limited.  I consider that argument is not supported by the observation of Burton J which emphasised that the terms of the contracts only formed part of the picture for the hypothetical contract. If, however, I am wrong about the extent of the observation of Burton J, the factual circumstances of this Appeal were within the territory of resolving a conflict between contractual terms by reference to the facts of the non-contractual interface.  The conflict in this Appeal was between the lower and upper level contracts commencing 3 April 2000 which contained no substitution clause, and those contracts which did, starting from 2 October 2000. The fact that there was no substitution clause in the contracts prior to 2 October 2000 gave support to my conclusion that Gerling NCM would not have agreed to a substitution clause had it negotiated the contract direct with Mr Shepherd.
111.	I am grateful to the parties for their detailed submissions on the relevance of the mutual intention of parties to the disputed issue of whether the hypothetical contract is a contract of service or not. Essentially I agree with the legal analysis of Appellant’s counsel. Under the common law of employment mutual intention of the parties expressed as a statement in a written contract and or an actual intention established by evidence may be a relevant factor amongst others in establishing the correct status of a contract for work. Evidence of mutual intention is unlikely to be conclusive, its importance may vary according to the circumstances of the case. The true nature of the relationship, however, cannot be altered by simply putting a different label on the agreement. The IR35 legislation leaves in place the legal principles on employment status established by case law. The circumstances for determining the contents of a hypothetical contract include the terms of the contracts and the context in which the services are provided.  A statement of mutual intention or evidence thereof may form part of the circumstances as defined by the 2000 Act and the 2000 Regulations. 
112.	The Respondents’ contention that evidence of mutual intention should be excluded was based on the proposition that its inclusion skewed the IR35 analysis which was unfair and defeated the purpose of the legislation. I consider their proposition merged the two stages of identification of the evidence and its evaluation, and assumed that the IR35 analysis started with a blank canvass rather than a set of actual arrangements which purport to be a contract for services. I conclude that the parties’ mutual intention forms part of the circumstances which are taken into account in the analysis of the hypothetical contract. The weight to be attached to the evidence of mutual intention would vary from case to case. A mere statement asserting contract for services carries no evidential weight unless that intention has been translated into actual substantive arrangements of self-employment.  
113.	I was not convinced by Appellant’s counsel submission that I should evaluate the hypothetical contract of Mr Shepherd in the context of service providers in the same line of business. Counsel relied on the judgments in Market Investigations and Hall v Lorimer for his submission. I consider these judgments are authorities for the proposition that each case should be decided on its own individual circumstances, and that the facts which may be compelling in one case in the light of all the facts may not be compelling in the context of another case.
114.	Turning to the evaluation of the terms of the hypothetical contract, I find that
(1)	Mutuality was satisfied by the obligations upon Mr Shepherd to perform the services of an IT specialist and upon Gerling NCM to pay him for those services throughout the period of the fixed term contracts.
(2)	Mr Shepherd was obliged to provide his services personally and exclusively during the hours contracted.
(3)	Gerling NCM was required to provide work of 36 hours per week under the contracts which could only be terminated early by four weeks notice or on exceptional grounds.
(4)	Gerling NCM had the right to assign Mr Shepherd to specific work projects and teams, and require him to report on progress and submit his work for checking by quality assurance team. Mr Shepherd was obliged to attend the offices of Gerling NCM during specified hours. The controls exercised over Mr Shepherd were the same as those for Gerling’s employees and consistent with a contract of service.
(5)	The obligation upon Mr Shepherd to obtain prior authorisation for extra hours and absence, and the obligation upon Gerling NCM to provide equipment indicated a contract of service.
(6)	No employee benefits was, in my view neutral, particularly as Mr Shepherd’s fee, twice the payment rate  for an equivalent  member of staff, provided him with more than adequate compensation for the loss of benefits.
(7)	I placed no weight on the term that the parties did not intend to create an employment relationship. This intention was not reflected in the other terms found for the hypothetical contract or in the actual work arrangements for Mr Shepherd which were similar if not the same for a Gerling employee doing equivalent work. 
115.	Under the contextual circumstances I found that Mr Shepherd was not exposed to significant financial risk from his engagement with Gerling NCM. Mr Shepherd was part of the scenery at Gerling NCM. There was no compelling evidence that Mr Shepherd was in business on his own account during his engagement with Gerling NCM. His established tax treatment as a self-employed person did not prevent him from being an employee of Gerling NCM and of no significance in the light of all the circumstances.  
116.	I find that the hypothetical contract would have the necessary irreducible minimum to constitute an employment contract. When I stand back and consider the position as a whole I conclude that the picture painted of the relationship between Gerling NCM and Mr Shepherd was overwhelmingly one of employment.
Decision
117.	In the light of my findings I decide in principle that if the services were provided under a contract directly between Mr Shepherd and Gerling NCM, Mr Shepherd would be regarded for income tax purposes as an employee of the Gerling NCM for the tax years 2000/01 and 2001/02,  and for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner's employment by Gerling NCM for the period 6 April 2000 to 5 April 2002. I, therefore dismiss the Appeal.

                                 MICHAEL TILDESLEY OBE
                                 SPECIAL COMMISSIONER
	                  RELEASE DATE: 19 May 2008

LON/

Authorities referred to in skeletons and bundles but not referred to in the decision:

Airfix Footwear Ltd v Cope [1978] IRLR 396
Ansell Computer Services Ltd v Richardson (Inspector of Taxes) [2004] STC (SCD) 472.
Datagate Services v HMRC [2007] SPC  00656
Davies v Braithwaite [1931] 2KB 628
Esterson, R v Revenue and Customs [2005] EWHC 3037 (Admin)
Ferguson v John Dawson [1976] IRLR 346
Future Online v Foulds  [2004] 76 TC 590
Island Consultants Ltd v The Commissioners for HMRC [2007] SPC 00618
Global Plant Ltd v Secretary of State for Health and Social Security [1972] 1 QB 139 [1971] 3 All ER 385.
Lime-IT Ltd v Justin (Officer of the Board of Inland Revenue) [2003] STC (SCD) 15
Massey v Crown Life Insurance Co [1978] 1 WLR 676, [1978] ICR 590, [1978] 2 All ER 576, [1978] IRLR 31, CA.
McManus v Griffiths (Inspector of Taxes) [1997] STC 1089, 70 TC 218
Morren v Swinton and Pendlebury Borough Council [1965] 2 All ER 349
MKM Computing Ltd v HMRC [2007] SPC  00653
Netherlane Limited v Simon York  [2004] SPC00457
Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612, [1984] IRLR 240, CA.
Prater v Cornwall County Council [2006] 2 AllER 1013
WHPT Housing Association Limited v The Secretary of State for Social Services 
1981 Unreported SJ/465/80
Young v Woods [1980] IRLR 201