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Ca No:CH/2004/APP/0271 Neutral Citation Number:[2004]EWHC2248(Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Date:Friday,8th October2004 Before:
THE HONOURABLE MR JUSTICE PARK
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Between:
Utech Limited Appellant
-and-
Graeme Young(HM Inspector of Taxes)
-
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Simon Devonshire(instructed by Nelsons)for the Appellant
Akash Nawbatt(instructed by the Solicitor of Inland Revenue)for the Respondentcomputer browr
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Approved Judgment
I direct that pursuant to CPR PD39A para6.1no official shorthand note shall be taken of this Judgment and that
copies of this version as handed down may be treated as authentic.
.............................
Mr Justice Park
潜力
Mr Justice Park:
Abbreviations,dramatis personae,etc
1.The are as follows.
ABB ABB Vetco Gray(UK)Limited,the‘end ur’of the rvices of Mr
freshman是什么意思Hood;a company which provided a range of equipment to the oil and
gas industry.
Mr Devonshire Simon Devonshire,counl for Utech.
EAT Employment Appeal Tribunal.
Hood,Mr William Hood,specialist in a software system ud by ABB,called
Pro-Engineer;shareholder in and director of Utech.
IR35The reference number of an Inland Revenue Press Relea of2000,
which led to the enactment of the legislative provisions which are in
point in this ca.
Nawbatt,Mr Akash Nawbatt,counl for the Inspector of Taxes,the respondent to
this appeal.
NES NES International Limited,a company described as an agency
company which provided technical recruitment rvices.
braveryNICs National Insurance Contributions
Utech Utech Limited,the appellant on this appeal;‘one man company’
owned by Mr Hood,which provided his rvices to end urs.
Overview
2.
3.This is a tax and NICs appeal by the taxpayer,Utech,against a decision of a Special Commissioner,
Mr Colin Bishopp,dated12March2004.The decision determined a question of principle concerning the liability to tax and NICs of Utech and its principal shareholder and director,Mr Hood.Utech was a ‘one man company’who business consisted of making the rvices of Mr Hood available to third party urs.By transactions entered into in May2000Mr Hood’s rvices were made available to ABB,and he worked in the business of ABB for about17months from1June2000.The transactions involved not only Mr Hood,Utech and ABB,but also,in a manner which I will describe later,another company, NES.Mr Hood had no beneficial interest in NES.The question of principle is whether the transactions attracted the operation of provisions introduced,both for tax and for NICs,in2000and commonly
referred to as the IR35legislation.IR35was the reference number of an Inland Revenue Press Relea which had foreshadowed the legislation.
4.If the IR35legislation applied its effect would be to treat payments received by Utech for the provision
by it of Mr Hood’s rvices(the payments being received,not from ABB directly,but from NES)as if they had been personal income of Mr Hood from an employment with ABB.For income tax they woul
d be treated as emoluments taxable under Schedule E,rather than as receipts of Utech’s trade which would be taken into account in computing its profits liable to corporation tax.For NICs they would be treated in a similar way as employment income of Mr Hood.The liabilities both to income tax and to NICs would fall to be met by Utech,not by Mr Hood.Thus it is Utech which is the appellant taxpayer.
5.The Inland Revenue issued formal decisions that the IR35provisions applied,and Utech appealed to
the Special Commissioners.In form there were two decisions and two appeals,one for tax and one for NICs,but they turned on two ts of almost identical legislation and stood or fell together.The appeals were heard by Mr Bishopp on22January2004,and by a rerved decision dated12March2004he dismisd the appeals,thus affirming the decisions which the Inland Revenue had issued.Utech now appeals to me.It is clear that an appeal can only succeed if the decision was wrong in law.There is no appeal on a question of fact:e s.56A(1)and(4)of the Taxes Management Act1970.
5ing6.Mr Devonshire,who appears for Utech,has helpfully limited his submissions to two specific respects
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in which he says that the Special Commissioner erred in law.I will describe them fully later in this judgment.The first respect involves an argument that the IR35legislation cannot apply becau of a contractual provision between Utech and NES(not between Utech and ABB or between NES and ABB),which Mr Devonshire submits must be taken into account,entitling Utech to provide the rvices of a substitute in place of Mr Hood.I will refer to this as the right of substitution argument.The cond respect in which Mr Devonshire says that the Special Commissioner erred involves an argument that ABB was not obliged to provide work for Mr Hood to do(although in fact it did do so).Therefore,it is argued that,even after applying the hypothes required by the IR35provisions,there was insufficient mutuality of obligation for an employer/employee relationship to exist,with the result that the provisions did not apply.I will refer to this as the want of mutuality argument.
7.I have considered Mr Devonshire’s arguments carefully,but my conclusion is that I cannot accept either
of them.The issues are too complex for me to encapsulate the esnce of my reasoning in this overview at the beginning of my judgment.I shall explain it as the judgment progress.The result is that I respectfully agree with the decision of the Special Commissioner.Therefore I shall dismiss the
appeal.
The IR35legislation
8.
9.For income tax and corporation tax(income tax so far as concerns Mr Hood and corporation tax so far
as concerns Utech)the legislation is contained in ction60of and Schedule12to the Finance Act 2000.The critical provisions are tho which identify the cas to which Schedule12applies.If the Schedule applies there is not,if I understand correctly,any dispute as the conquences.The dispute is whether it applies at all.The ca revolves around provisions in paragraph1of the Schedule.I will now t out the relevant parts of the paragraph,interpolating in italicid square brackets the actual identities in this ca of the parties referred to in general terms in the paragraph.
1(1)This Schedule applies where–
(a)an individual(‘the worker’)[Mr Hood]personally
performs,or is under an obligation personally to perform,
rvices for the purpos of a business carried on by
another person(‘the client’)[ABB],
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(b)the rvices are provided not under a contract directly
between the client[ABB]and the worker[Mr Hood]but
under arrangements involving a third party(‘the
intermediary’)[Utech],and
(c)the circumstances are such that,if the rvices were
provided under a contract directly between the client[ABB]
and the worker[Mr Hood],the worker would be regarded
for income tax purpos as an employee of the client
[ABB].
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(2),(3)…
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(4)The circumstances referred to in sub-paragraph(1)(c)
include the terms on which the rvices are provided,having regard
to the terms of the contracts forming part of the arrangements under
which the rvices are provided.
10.
plotter11.In the quotation of sub-paragraph(1)(b)above I have identified‘the intermediary’in this ca as being
Utech.As I will explain later,on the facts NES might also be regarded as an intermediary in the general n of the word,but it is clear from paragraph3of Schedule12,which I need not t out verbatim,that only Utech counts as an intermediary for the purpos of paragraph1.However,the ‘arrangements involving…the intermediary’(referred to in sub-paragraph(1)(b))may involve other persons as well as the intermediary.If they do the respects in which the other persons are also involv
ed may affect the application or non-application of paragraph1.In the prent ca this could be relevant to the participation of NES in the entire transaction:NES was neither‘the worker’nor‘the client’nor‘the intermediary’,but it was involved in the arrangements in which‘the intermediary’(Utech)was involved,so its part in tho arrangements falls to be taken into account as well as Utech’s part in them.
12.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 tho two sub-paragraphs are satisfied sub-paragraph(c)involves an exerci of constructing a hypothetical contract which did not in fact exist,and then enquiring what the conquences would have been if it had existed.There may be room in some cas for dispute about what the hypothetical contract would contain,and in the prent ca there is.The dispute aris in connection with the right of substitution argument which is advanced by Mr Devonshire on behalf of Utech.I will explain how precily the issue aris at a later stage in this judgment.
13.The comparable provisions for NICs are contained in regulation6of the Social Security Contributio
ns
(Intermediaries)Regulations2000.They are not quite identical to the provisions in the Finance Act2000, but they are similar in all relevant respects.For completeness I will t out the specific wording.
6(1)The Regulations apply where–
(a)an individual(the worker)[Mr Hood]personally performs,or is
under an obligation personally to perform,rvices for the purpos
of a business carried on by another person(the client)[ABB],
(b)the performance of tho rvices by the worker[Mr Hood]is
carried out,not under a contract directly between the worker[Mr
Hood]and the client[ABB],but under arrangements involving an
intermediary[Utech],and
(c)the circumstances are such that,had the arrangements taken the
form of a contract between the worker[Mr Hood]and the client
[ABB]the worker[Mr Hood]would be regarded for the purpos of
Parts I to V of the Contributions and Benefits Act as employed in
employed earner’s employment by the client[ABB].
As in the Finance Act2000there is a provision(regulation5)under which‘the intermediary’is,so far as this ca is concerned,Utech(and not NES).However,the same point applies in that,to the extent that NES was involved in the arrangements,its participation may have to be taken into account in determining whether regulation6applies notwithstanding that it was none of the parties(‘the worker’,‘the client’,or‘the intermediary’)specifically identified in the regulation.Curiously regulation6does not contain a provision like paragraph1(4)of Schedule12to the Finance Act2000,expanding on what is covered by‘the circumstances’referred to in sub-paragraph(c)of regulation6(1).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 ca or opens a possibility of the ca being decided one way for NICs and another way for income tax and corporation tax.
The facts
14.
15.Mr Hood has now retired but at the time when this ca aro he worked in connection with the
production of design drawings of oil wells,rigs and similar equipment.He was a specialist in the u of
a software product called Pro-Engineer,which produced3-D models of such equipment.He started to
operate through his one man company,Utech,in May1996.There was no evidence before the Special Commissioner about his arrangements before then,so the Commissioner inevitably decided the ca on the basis of the Utech arrangements alone,uninfluenced by what Mr Hood’s tax and national insurance status may have been in earlier years.
16.Utech had veral engagements for the provision of Mr Hood’s rvices to‘end urs’over its trading
life from1996to May2003(when Mr Hood was obliged to retire by reason of ill health).Some of the en
gagements were pursuant to direct contracts between Utech and the end urs,but engagements with ABB were not,since,as I explain in more detail in the next paragraph,NES was interpod between Utech and ABB(the end ur).There were three different periods when Mr Hood was working in the business of ABB at its premis in Aberdeen.The prent ca is specifically about the period of17 months beginning in June2000.(In fact the Special Commissioner was only strictly concerned with the period from1June2000to31March2001,but I assume that that was for some procedural reason to do with tax years or companies’accounting periods or something of that nature.The Commissioner’s decision would undoubtedly govern the whole period of the engagement for Mr Hood to work in the business of ABB.)
17.ABB is a United Kingdom subsidiary of a world-wide group which provides a range of equipment to the
oil and gas industry.It has a core staff of750to850permanent employees,but it supplements them when demand requires by taking on what its Human Resources Manager described as‘sub-contract employees’.This was done by means of companies described as‘agencies’,of which NES was one.
There was no evidence from NES,but on its letter heading it describes itlf as‘Europe’s largest tech
nical recruitment agency’.As will appear,NES sometimes acted contractually as a principal rather than as an agent in the strict legal n.
18.The way in which Mr Hood was engaged to work in the business of ABB,which I assume was typical of
how ABB and NES operated,was as follows.Management within ABB identified that ABB had a need for another specialist in Pro-Engineer,but did not wish to have another permanent employee recruited.
The Human Resources manager contacted agencies,including NES.NES knew about Mr Hood,and contacted him,or more strictly contacted his personal company,Utech.Mr Hood was obviously
