A special commissioner decided in principle that if the services of an IT consultant had been provided under a contract directly between the consultant and the client rather than through his personal service company, the consultant would have been regarded for income tax purposes as an employee of the client for the tax years 2000–01 and 2001–02, and as employed in employed earner's employment by the client for the relevant period for the purposes of Pt. I–V of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992).

Facts

The taxpayer appealed against determinations made pursuant to the IR35 legislation, 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 the taxpayer's sole director and shareholder (S), in respect of his work for a client company (G).

Issues

Whether the IR35 legislation applied in principle to the whole of the work undertaken by the taxpayer for G in the relevant years; and whether S would have been an employee of G if he had contracted directly with G under the hypothetical contract presupposed by the IR35 legislation.

Decision

The special commissioner (Michael Tildesley) (dismissing the appeal) said that in order to decide whether a person carried on business on his own account it was necessary to consider many different aspects of that person's work activity. Each case had to be decided on its own individual circumstances, and the facts which might be compelling in one case in the light of all the facts might not be compelling in the context of another case. In the present case, the court would consider the evidence and findings of fact in the light of the indicators of employment and self-employment as identified by the Court of Appeal in Hall (HMIT) v Lorimer [1993] BTC 473. Considering mutuality of obligation, S was required to perform services to complete IT projects for which G was obliged to pay a fee. G was also obliged to provide work for S. S did in fact work on average 35.25 hours per week throughout the two tax years under appeal.

The controls of reporting and quality assurance exercised over S's work were the same as those applied to G's employees working on IT projects. S worked as a member of a team, not generally on his own.

The taxpayer's submission that G did not require S to perform the contracted services personally relied upon a substitution clause in the contracts. That submission was without substance, and G had effectively contracted with S to perform the required services. The substitution clause was of no practical effect. S performed the services throughout the seven years he worked for G. If G had been contracting directly with S it would not have agreed to a substitution clause (Usetech Ltd v Young (HMIT) [2004] EWHC 2248 (Ch); [2005] BTC 48 considered).

Whilst under contract with G, S was required to provide his services exclusively during the hours worked. There was no compelling evidence that S was in business on his own account during his engagement with G.

S was integrated within the IT department of G. He worked there for seven years, doing on average 36 hours a week until April 2004. He worked generally as a member of a team, which included employees. As with members of staff working on IT projects, he was required to make progress reports and submit his work to the quality assurance team. The relevant contracts specified that the agreements did not constitute or imply an employment relationship between the parties. The insertion of such a clause in the hypothetical contract, however, would not be decisive about the nature of the working relationship between S and G. The effect of such a clause had to be considered in the context of the contract as a whole.

The legislation required the court to construct a hypothetical contract between G and S for the tax years in question from its 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. Under the contextual circumstances S was not exposed to significant financial risk from his engagement with G. His established tax treatment as a self-employed person did not prevent him from being an employee of G.

In the circumstances the hypothetical contract would have the necessary irreducible minimum to constitute an employment contract.

(2008) Sp C 685.
Decision released 19 May 2008.