The High Court held that a taxpayer company which provided workers for clients in the construction industry was not entitled to recover sums paid in error to the Revenue where the general commissioners had found, at the request of the taxpayer, that the clients had engaged the workers and the taxpayer operated as a payroll agent so that sums paid to the Revenue by the taxpayer were as agent acting on behalf of its principals.

Facts

The taxpayer provided employment services to contractors in the construction industry. It supplied workers to its clients for a fee and managed the clients’ payroll and regulatory matters relating to those workers. Initially the taxpayer treated the workers as self-employed for tax and National Insurance purposes and therefore did not operate PAYE.

The Revenue then ruled that the taxpayer was required to operate PAYE and pay National Insurance contributions (NICs) as if the workers it supplied were its employees, pursuant to the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689) and ICTA 1988, s. 134.

In 2000, the taxpayer argued that its contract with the workers it supplied did not fall within the relevant provisions and, before the general commissioners, it submitted that its role was as payroll agent for its clients. The general commissioners concluded that the taxpayer had not been obliged to make the payments to the Revenue. Its clients should have deducted and/or paid over PAYE income tax and primary and secondary Class 1 NICs for those workers who were employees; and deducted and paid over the sums due pursuant to ICTA 1988 for subcontractors.

Following the decision of the general commissioners there was a meeting between the parties ‘to plan out the route to take’ following the decision. Thereafter the Revenue repaid primary Class 1 NICs to workers directly and repaid secondary contributions to the taxpayer. The Revenue did not repay PAYE income tax to the taxpayer in respect of those workers who were subcontractors, nor in respect of those who were employees of the clients since the relevant tax and contributions had been properly payable by the clients. More than two years later the taxpayer applied for repayment of £560,000, comprising: 40 per cent of employer's Class 1 NICs paid in respect of the workers treated as employees of its clients; 60 per cent of employees’ Class 1 NICs paid in respect of those workers treated as self-employed; 40 per cent of employees’ class 1 NICs paid in respect of the workers treated as employees of its clients; and 60 per cent of PAYE income tax due in respect of workers treated as self-employed. It claimed a right to restitution, as a person who had paid to the Revenue in error or in protest sums that were not due or were the result of an unlawful demand (Woolwich Equitable Building Society [1993] AC 70) and under reg. 52 of the Social Security (Contributions) Regulations 2001 (SI 2001/1004).

The Revenue argued that the taxpayer had no legal claims as they vested in the taxpayer's clients for whom it had acted as agent; the taxpayer was estopped from denying that there was an agency relationship as represented before the general commissioners; and, if the taxpayer did have a claim, it had been compromised by agreement at the meeting following the general commissioners’ decision.

Issues

Whether the taxpayer had a claim to repayment in its own right; whether it was estopped from denying the position adopted before general commissioners; whether the claims in issue had been compromised by agreement.

Decision

Judge Mackie QC (dismissing the taxpayer's claim) said that the decision of the general commissioners was that the workers had a contract with the clients, not the taxpayer. On the facts, the money paid by the taxpayer to the Revenue had been as an agent for its principals, and to that extent it was precluded from recovering payment except on behalf of its principal. Implicit in the findings of the general commissioners was the conclusion that the claimant's role was that of payroll agent. It followed that any right of recovery was that of the clients (or the workers), not the taxpayer.

The taxpayer had acted positively in the face of the commissioners, making an election and procuring from them an order affecting the Revenue in such circumstances that the court had no option but to hold it to its conduct and refuse to let it start again on the basis abandoned before the commissioners. Therefore an estoppel arose.

The evidence pointed clearly to the existence of a binding agreement between the parties to resolve issues outstanding from the commissioners’ decision. In practical terms, the parties gave effect to what was agreed at the meeting and it seemed clear that the issues arising from the commissioners’ decision had been not only agreed but resolved. The fact that the taxpayer had not brought a claim for more than two years indicated that it was apparently content with the outcome. On the evidence, it was clear that the parties’ agreement had compromised the issues arising from the general commissioners’ decision, including the claims for payment now put forward by the taxpayer.

Chancery Division.
Judgment delivered 7 November 2007.