A special commissioner decided that an individual 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. The contractor was a skilled professional who worked for the one client, and for no one else, on terms which were substantially similar, although not identical, to those applicable to an employee on fixed-term contracts.

Facts

M was the sole director, and owner of 50 per cent of the shares of, the taxpayer company. In September 1998 the taxpayer agreed to make M's services available to P Ltd, a company engaged in the business of making contract workers available to its clients. P Ltd in turn agreed to make M's services available to LGL. M rendered his services as a contract analyst programmer for the benefit of LGL under those arrangements which continued as the result of a number of extensions until 2002.

In 2004, the Revenue made a decision relating to National Insurance contributions (NICs) and two determinations relating to PAYE under the IR35 legislation. They concluded that the circumstances were such that had M been directly contracting with LGL, the nature of the arrangements would have led to the conclusion that he was an employee and accordingly that, under the IR35 legislation, the taxpayer was liable to NICs and PAYE. The taxpayer appealed.

Issue

Whether, had the arrangements taken the form of a contract between M and LGL, M would be regarded as employed by, or as an employee of, that company.

Decision

The special commissioner (Charles Hellier) (dismissing the appeal) said that there was an irreducible minimum for a contract of employment described in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 where three necessary conditions were set out for a contract of services: the mutuality test; the control test; and the inconsistency test (the other provisions of the contract were consistent with its being a contract of service). Those tests were a good starting point when considering whether a contract was one of employment, although the nature and extent of the requirements for mutuality and control were not rigid but depended upon the circumstances.

There were two aspects to the mutuality test: first that there was some mutuality of obligation; and second that the contract was for his personal service. The second aspect gave rise to the question whether a right for the taxpayer to substitute another person in his place could prevent a contract being one for service. The first aspect clearly covered the requirement that there be an obligation on the one hand to work and on the other to remunerate. The more difficult question was whether there was also an obligation for the employer to provide work (or to pay when there was no work to be done). The former was a condition for there to be employment, the latter a strong pointer towards employment (see Cornwall County Council v Prater [2006] EWCA Civ 102). By contrast Park J in Usetech Ltdv Young (HMIT) [2005] BTC 48 regarded an employer's obligation to provide work or to pay if there was none as a touchstone of employment.

As regards substitution, the contract had to be for personal service. A limited or occasional power of delegation or right to substitute another person might be consistent with a contract of personal service. In particular, a contract containing a right to substitute if and only if the employer consented was, until consent was given, a contract which plainly satisfied the personal service condition, although the presence of that right might be an indication of self-employment. Further, there was no indication that absolute control was required for employment. In Morren v Swinton and Pendlebury Borough Council [1965] 1 WLR 576 Parker CJ indicated that in the case of a professional person there could be cases where there was no question of the employer telling him how to do the work. However, something which could be called control was a necessary feature of an employment relationship even for a skilled employee; but the nature of the power of control which sufficed might differ with the nature of the job.

Having considered whether those conditions were satisfied, the tribunal had to consider all the circumstances and ask whether the taxpayer was in business on his own account. The object of the exercise was to paint a picture from the accumulation of detail. The overall effect could only be appreciated by standing back from the detailed picture, viewing it from a distance and making an informal, considered qualitative appreciation of the whole. Not all details were of equal weight and the details might also vary in importance from one situation to another (Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173; Hall (HMIT) v Lorimer [1993] BTC 473 considered).

Nevertheless the consideration of certain indicia which could point one way or the other might be helpful in considering that picture. Those indicia included: whether the taxpayer provided his own equipment; whether the taxpayer hired his own helpers; what degree of financial risk or opportunity for profit the taxpayer had; what degree of responsibility for investment and management the taxpayer had; whether the taxpayer was part and parcel of his employer's organisation; the degree of control to which the taxpayer was subject; termination provisions; the intention of the parties; and the extent of mutual obligations and of the employer's obligation to provide work or pay in lieu of so doing.

In the present case, it was important to consider the terms of the notional contract between LGL and M because some of the more important conditions for, and indicia of, employment or otherwise flowed from the legal rights and duties of the parties rather than from the general nature of the relationship between the parties. Whether one considered simply a contractual embodying of the arrangement or what would have been included in a notional contract, at a very minimum, the hypothetical contract would have required M to report his progress regularly to persons at LGL, to discuss with such persons the content and progress of his work, and to co-operate with them and to adapt the course of his work so as to ensure the most effective progress of the work he was doing as a result of those consultations and discussions.

On the evidence, LGL's management regarded the arrangement it had with P Ltd as being for the supply of M's services only. That was whom they interviewed, whom later they knew and whom they thought they would get. Whilst they would consider any proposed substitute they did not regard themselves as being bound to do so, and even if a proposed substitute were interviewed and found acceptable they did not regard themselves as bound to accept him (although had M been truly unable to perform the expected duties and an acceptable substitute been offered by P Ltd, they would have recognised their obligation under the P Ltd/LGL contract to accept that substitute in place of M).

The highest that M's expectation could be put at the relevant time was that he had a confident expectation that if he was ill and could find a suitable substitute it was very likely that that substitute would be accepted by LGL. As regards the taxpayer's relationship with P Ltd, M would have regarded the question as determined by the terms of the P Ltd/taxpayer contract properly construed. On the evidence, it appeared that LGL would not have agreed to accept anyone sent along by M as his substitute. The right to substitute would have been very limited only to a person approved in advance by LGL. The nature of the constraints and guidance to which M was subject was an indication of employment.

Had the contract been simply for the delivery of a particular project it could have been inconsistent with a contract of service, but it was not. It was for expert time to be spent in the development and delivery of the project. On the whole, the distinct impression was that under the notional contract M would have been an employee.

(2007) Sp C 653.Decision released 11 December 2007.