USETECH LTD V GRAEME YOUNG (HMIT) (2004)

 

[2004] EWHC 2248 (Ch)

 

Ch D (Park J) 8/10/2004

 

TAX

 

CONTRACT OF EMPLOYMENT : CONTRACTS FOR SERVICES : INCOME TAX : INTERMEDIARIES : NATIONAL INSURANCE CONTRIBUTIONS : PROVISION OF SERVICES THROUGH INTERMEDIARIES : MUTUALITY OF OBLIGATION : RELATIONSHIP OF EMPLOYEE AND EMPLOYER : NOTIONAL CONTRACTS : HYPOTHETICAL CONTRACTS : RIGHT OF SUBSTITUTION : IR35 LEGISLATION : Sch.12 FINANCE ACT 2000 : reg.6 SOCIAL SECURITY CONTRIBUTIONS (INTERMEDIARIES) REGULATIONS 2000

 

The taxpayer company was liable to account for income tax under the Finance Act 2000 Sch.12 and national insurance contributions under the Social Security Contributions (Intermediaries) Regulations 2000 reg.6, where there was a notional contract of employment, which the provisions required to be assumed, between an engineer, who was the director of the taxpayer company, and a client for the provision of his services.

 

The appellant taxpayer company (U) appealed against a decision that it was liable to account for income tax under the Finance Act 2000 Sch.12 and national insurance contributions under the Social Security Contributions (Intermediaries) Regulations 2000 reg.6 .

 

U's business consisted of providing the services of its principal shareholder and director (H) to third party users.

 

U contracted with an agency (N) which in turn contracted with a company (B) for the provision of H's services.

 

U's agreement with N required U to provide the services to the reasonable satisfaction of B, and contained a provision for the substitution of H.

 

The contract between N and B was solely for the provision of H's services, and there was no provision for the supply of a substitute.

 

The issue was whether the transactions attracted the operation of the provisions in the 2000 Act and 2000 Regulations (the IR35 legislation).

 

The tribunal held that the IR35 legislation applied and a notional contract between B and H, which was a contract of service had to be assumed.

 

U argued that (1) there had been a right of substitution in the notional contract between H and B, the effect of which was that the relationship between them was legally incapable of being the relationship of employee and employer; (2) the contract could not be a contract of employment unless there was mutuality of obligation.



 

HELD:   (1) Whether a relationship was one of employment or not required an evaluation of all of the circumstances, Synaptek Ltd v Young (HMIT) (2003) EWHC 645 (Ch), (2003) STC 543 considered.

 

There would not have been any right of substitution in the notional contract between H and B, which the IR35 legislation required to be assumed.

 

A hypothetical contract between H and B would not have contained a substitution provision.

 

The actual terms on which H's services were provided to B did not contain a substitution provision, and there would be no justification for assuming that if he had contracted directly with B, he would have provided his services on a different basis.

 

Furthermore, it could not be argued that because U and H did not have specific knowledge that the contract between N and B did not contain a highly improbable provision, they escaped the operation of the IR35 legislation.

 

(2) It was open to the tribunal to form the view that, if there had been a direct contract between H and B, for the provision of his services to B, it would have fallen to be regarded as a contract of employment.

 

B provided work for H over a continuous period of 17 months, and provided enough work for him to work 58 hours in a typical week.

 

Further, the contract between N and B specified a minimum of 37.5 hours per week.

 

If B sent H home in a week when he worked less than 37.5 hours, B was liable to pay for unworked time up to a total of 37.5 hours for the week.

 

The minimum hours provision presented a fundamental objection to the want of mutuality argument.

 

It was only where there was both no obligation to provide work and no obligation to pay the worker for time in which work was not provided that want of mutuality precluded the existence of a continuing contract of employment, Clark v Oxfordshire Health Authority (1998) IRLR 125 , applied.

Appeal dismissed.

 

Counsel:
For the claimant: Simon Devonshire
For the respondent: Akash Nawbatt

Solicitors:
For the claimant: Nelsons
For the respondent: Solicitor for Inland Revenue

 LTL 18/10/2004 : (2004) STC 1671 : Times, October 22, 2004

 

 

Document No. AC0107003 

 

 

Source: Lawtel http://www.lawtel.co.uk , copyright acknowledged.