A special commissioner decided that, on the facts, a contractor who provided his services through an intermediary company to a third party client would have been regarded as an employee if he had been engaged directly by the client. Accordingly, under the ‘IR35’ legislation the intermediary was liable to pay National Insurance contributions (NICs) and income tax under PAYE in respect of the payments made to the contractor.

Facts

The taxpayer company's sole director (B) was an IT system tester. B owned 50 per cent of the shares in the taxpayer. The taxpayer appealed against decisions and determinations made in respect of PAYE and NICs by the Revenue under the IR35 provisions totalling £99,000. In the relevant period the taxpayer, via an agency (DPP), had provided B's services to a client, AA. The work was testing aspects of three IT projects then being undertaken by AA. The Revenue took the view that the circumstances were such that, if the services had been provided under a contract directly between B and AA, Bwould have been regarded for income tax purposes as an employee of AA.

In outline, the IR35 legislation, contained in FA 2000, Sch. 12 for direct tax and the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000/727), reg. 6 for NICs, provided that if the circumstances were such that, had B performed his services under a contract directly between him and AA, that contract would have been one of employment, then the taxpayer would be liable for NICs and PAYE calculated broadly on the basis that the payments it received were emoluments it paid to B. The taxpayer contended that under such a contract B would not have been an employee.

Issue

Whether, if the arrangements had taken the form of a contract between B and AA, B would have been regarded as an employee of AA.

Decision

The special commissioner (Charles Hellier) (dismissing the appeal) said that a contract of service existed if three conditions were fulfilled: (1) the servant agreed, that in consideration of a wage or other remuneration, he would provide his own work and skill in the performance of some service for his master; (2) he agreed, expressly or impliedly, that in the performance of that service he would be subject to the other's control in a sufficient degree to make that other master; (3) the other provisions of the contract were consistent with its being a contract of service (Ready Mixed Concrete v Minister of Pensions and National Insurance [1967] 2 QB 497 and Montgomery v Johnson Underwood Ltd [2001] EWCA Civ 318 applied). Having considered mutuality and control, the court would consider whether the person performing the services was a person in business on his own account (Market Investigations Ltd v Minister for Social Security [1969] 2 QB 173 applied).

In relation to mutuality, for there to be an employment contract there had to be a contract. That required some mutual obligations. That contract could not be an employment contract unless the ‘employee’ was obliged to provide his labour. An obligation on the employer to provide work or in the absence of available work to pay was not a precondition for the contract being one of employment, but its presence in some form was a touchstone or a feature one would expect to find in an employment contract and where absence would call into question the existence of such a relationship (Nethermere (St Neots) v Taverna [1984] IRLR 240, Carmichael v National Power plc [1999] 4 All ER 897, Property care Ltd v Gower [2003] UKEAT/0547/03, Usetech Ltd v Young (HMIT) [2005] BTC 48 and Cornwall County Council v Prater [2006] EWCA Civ 102 considered).

The first two Ready Mixed Concrete preconditions were satisfied: (1) the contracts would have been for the personal service of B in return for remuneration.

The limited possibility of substitution would not have prevented them being for contracts for his services; (2) the right of AA to direct through the operation of the team and the guidance of the team manager was enough, in the case of a skilled professional man, to be able to say that there was sufficient control. The notional contract would contain provisions requiring B to be subject to the guidance of his team and team manager. That was a sufficient right of control.

The mutuality condition was satisfied by an obligation to work in return for an obligation to remunerate. That condition was satisfied by the notional contracts. A requirement to make work available (or to pay when it was not) was a significant pointer towards employment. If the notional contract would have obliged AA to pay only for work done, that would point away from a contract of employment. However, that was counterbalanced by the fact that it was known that work would be available during the period of the contract.

The other factors pointed only weakly away from employment. There was nothing which pointed strongly to the conclusion that B would have been in business on his own account; by contrast, looking at the overall picture, B was someone who worked fairly regular hours during each engagement, who worked on parts of a project which were allocated to him as part of AA's teams, who was integrated into AA's business, and who had a role similar to that of a professional employee. B did not get paid for, or go to work to provide, a specific product; instead, he provided his services to AA to be used by them in testing the parts of a project which from time to time were allocated to him. He was engaged in relation to the work to be done on a specific project but not to deliver anything other than his services in providing testing in relation to that project. He would have been an employee had he been directly engaged by AA.

(2007) Sp C 655.

Decision released 11 December 2007.