The High Court dismissed a cross-appeal by the Revenue against the finding of a special commissioner that there was no implied contract between a client and operative where a company, which hired in labour within the construction industry, entered into written contracts with each of those parties.

Facts

The taxpayer carried on business in the UK as a contractor of hired-in labour. Its objective was that instead of the client engaging the operative as a labour-only subcontractor, as would normally happen, the taxpayer was interposed between them so that the client contracted with the taxpayer and the taxpayer contracted with the operative for which the taxpayer made a weekly charge per operative. It had about 112 clients who engaged about 1,300 operatives through the taxpayer.

There was no written contract entered into between the client and the operative. Operatives approached the clients directly. Any negotiation about the amount of payment, the nature of work to be undertaken and the time scale for completing that work was negotiated between the operative and the client. The taxpayer had no involvement in those arrangements or negotiations. The taxpayer applied for a renewal of its certificate which was refused. The special commissioner, dismissing the taxpayer's appeal, concluded that the only contract under which labour was contracted to the client was provided by the company so that its business consisted of or included the furnishing of labour within ICTA 1988, s. 562(2)(a), as applied by s. 565(2) ((2005) Sp C 496).

An appeal by the taxpayer was subsequently withdrawn but the Revenue cross-appealed, contending, inter alia, that the taxpayer was merely a payroll facility so that a contract for service should be implied between client and operative, with the result that the taxpayer did not satisfy the requirements of s. 562(2)(a) and was not entitled to a certificate under s. 561.

Issue

Whether the special commissioner had erred in law in holding that there was no implied contract between clients and operatives.

Decision

Pumphrey J (dismissing the cross-appeal) said that in employment agency cases where there subsisted a contract between the intermediate and the operative, under which the operative agreed to provide services to the client, there would not normally be an express contract of any kind between the client and the operative. If such a contract was to be implied, it had to be according to normal principles, chief among which was necessity.

A classic employment agency relationship, in which there were just two express contracts, between operative and intermediate and between intermediate and client, would normally provide the operative with none of the advantages of being employed by the client or by the intermediate under a contract of employment. There were, therefore, cases in which the facts had been scrutinised with great care by the tribunal in order to satisfy itself that in truth there was no subsisting contract of employment.

In order to answer the question under s. 560(1)(a), i.e. whether the taxpayer was under a duty to its clients to furnish the labour of others in the carrying out of the operation or to arrange for the labour of others to be furnished in the carrying out of the operations, it was first of all necessary to ascertain what the contractual nexus was between the parties. In the present case, the special commissioner had found that the client negotiated terms and notified the taxpayer. The taxpayer then stepped into the shoes of the client and contracted with the operative upon the terms negotiated. The operative agreed, among other things, to be bound to the taxpayer to satisfy each and every obligation negotiated with the client, and the taxpayer agreed to abide by the obligations accepted by the client in negotiations with the operative. There was no question of seeking to infer a contract of employment between the client and the operative; rather, the Revenue sought to imply a contract for service between the client and the operative on the footing that if such a contract subsisted, then the taxpayer could not be said to satisfy the requirements of the section.

It was clear that the contents of the contractual relationships, once concluded, were unusual and directed more to meeting the exigencies of s. 560 than to any other purpose. However, absent a finding that the contracts were a sham and not intended to bring about the legal relationship between the parties that they appeared to do, it had to be accepted that the parties had intended to bring about the legal result that they had done.

Having found that there was no obligation to be implied between the client and the operative, the commissioner held that the only contract under which labour was contracted to the client was provided by the taxpayer and its business consisted of or included the furnishing of labour. The commissioner had properly approached the question as one of an assessment of all the facts and he was entirely correct to focus upon the contractual relationship between the parties (Dacas v Brook Street Bureau (UK) Ltd [2004] IRLR 358 and Cable & Wireless plc v Muscat [2006] IRLR 354 applied).

Chancery Division.
Judgment delivered 30 January 2007.