F S Consulting

IR35 at the Special commissioners - The 'F S Consulting' Case

February 2002

F. S. Consulting Limited v. Patrick McCaul (HM Inspector of Taxes) [2001]
Special Commissioner: Nuala Brice
3 December 2001

In the anonymised decision of the Special Commissioner it was concluded that the factors which pointed towards there being a contract of service outweighed the factors which pointed towards there being a contract for services. The contractor was, therefore, to be considered as employed by the Client for the purposes of IR35.

The Facts
Mr Simpson, who was represented by counsel, started working as a computer programmer in 1987, and in 1997 he incorporated the appellant company F S Consulting Ltd (FSC Ltd). Mr Simpson was a sole director and shareholder of FSC Ltd and his services were supplied to the company. Mr Simpson was a computer consultant conversion specialist and evidence was accepted that his skills were comparatively rare.

FSC Ltd supplied his services through an agency called Topper Recruitment Ltd (Topper) although, Mr Simpson did write personally to other companies seeking positions with them. Mr Simpson was offered a contract through Topper with Better Investments Plc (Better Plc) which commenced in December 1998. The contract with Better Plc extended through to June 2001 although the decision under appeal relates only to the period from 6 April 2000 to 29 June 2001. Throughout this time Mr Simpson's services were provided by FSC Ltd through Topper to Better Plc.

The Contract
The contract between Topper and FSC Ltd including the attached schedule had the following provisions:

the services were to be performed by the individual named in the schedule - Mr Simpson was named as the specified consultant in the schedule;
FSC Ltd had the right to substitute Mr Simpson with another consultant who had previously provided consultancy of a high standard to Better Plc;
the services were to be performed at a specified location;
the individual had to take all necessary instructions from the client and comply with all the client's rules, regulations and procedures;
the individual had to record the hours worked on a Topper time sheet on a weekly basis and send it to Topper;
the contract could be terminated immediately if the client terminated its agreement with Topper because of incompetence, unsuitability or unprofessional conduct by the individual;
alternatively, the contract could be terminated by Topper with four weeks' notice; and
the contract clearly stated that in no circumstances could the contract be interpreted as a contract of employment and that it was a contract for the supply of services only.

The schedule stated:

that the client was Better Plc;
what the fee rate was per week including the hourly rate;
that overtime rates were pro rata; and
that the standard working week was 37.5 hours.

During the period under appeal Mr Simpson was working to a design co-written by himself and other consultants during a previous contract with Better Plc. The Project manager was an employee of Better Plc and there were seven members of the team, five employees and two consultants of which Mr Simpson was one. Mr Simpson never acted as a team leader and had no job title. Although the project manager controlled what was to be done and when, it was left to Mr Simpson to determine how the work was done. Consequently, there was very little direction and control.

The equipment was provided by Better Plc at their site and involved access to a mainfame computer. Mr Simpson was also provided with a desk in an open plan office, a telephone, a personal computer and anything else he needed for his work. All the work was done at either one of Better Plc's sites.

The hours worked in practice were flexible and were recorded on a time sheet which had to be signed off by a representative of Better Plc. Mr Simpson had to obtain permission for time off or holidays but this was never denied.

The contract was non-exclusive and, although he only ever worked for one client at a time, Mr Simpson was freely available to undertake work for other clients.

The Arguments
It was not disputed that Mr Simpson personally performed the services within the meaning of s.4A(1)(a) of the Social Security Contributions and Benefits Act 1992 and Regulation 6(1)(a) of the Social Security Contributions (Intermediaries) Regulations 2000. The issues for determination were thus:

whether the "arrangements" mentioned in Reg. 6(1)(b) and (c) were those involving the intermediary FSC Ltd but were not the "arrangements" involving Topper, who was not an intermediary as defined;
whether, had the "arrangements" taken the form of a contract between Mr Simpson and Better Plc, Mr Simpson would be regarded as employed in employed earner's employment by Better Plc; and
that the arrangements involving Topper were governed by the Social Security (Categorisation of Earners) Regulations 1978 and that Mr Simpson did not fall within the category of employed earner under those Regulations.

Counsel for the Appellant, Mr Antell, argued three points:

The initial argument raised by Mr Antell was based on the effect of s.2(1)(a) with s.2(2)(b) of the 1992 Act that it was "…necessary to find either a contract of service or a regulation which deemed Mr Simpson to be an employed earner." For clarity it is necessary to explain that the 1992 Act was a Consolidating Act and its predecessor was the Social Security Act 1975. The 1978 Regulations were made under the 1975 Act which corresponds with s.2 of the 1992 Act.

Mr Simpson, Mr Antell maintained, did not have a contract of service with Better Plc because "…there had been a succession of contracts and there was no foregone conclusion that a contract would be renewed; Mr Simpson decided his own hours and took holidays when he wanted to; Mr Simpson took the risks of invoicing and of having late payments and debts; Mr Simpson received no holiday or sick pay; there was no obligation on Mr Simpson to provide his own personal services; he was not integrated into the team and was not part and parcel of the organisation of Better; and he had no control over the employees of Better."

Mr Antell also relied upon R (on the application of Professional Contractors Group Ltd and others) v Inland Revenue Commissioners [2001] STC 631 at [48 (iv)] for authority that it was necessary to consider the 'actual' relationship and whether the client owed any obligation to the service provider. Mr Antell further stated that Mr Simpson owed no obligation to the client because he did not have to provide the work personally, being able to substitute his services with another. Mr Mitchell, Advocacy Adviser for the Inland Revenue, distinguished the case Professional Contractors Group on the basis that it concerned European Law and, therefore, could not be relied upon.

In the second argument Mr Antell submitted that in this appeal there was a service company (an intermediary) and an agency and that the 2000 Regulations, being silent on whether an agency is involved in the 'arrangements', only applied to arrangements with the service company. Topper had to be ignored because Regulation 5(2)(b)(i) of the 2000 Regulations provides that the worker has to have "…a material interest in the intermediary," where it is a company and Mr Simpson had no material interest in Topper. The 2000 Regulations thereby excluding arrangements where there was an intermediary (FSC Ltd) and a non-intermediary (Topper).

Mr Antell then brought in the 1978 Regulations which do deal with the position of the agency. Mr Antell argued that the 1978 Regulations could not be ignored because their existence is saved by Regulation 12 of the 2000 Regulations. Reg.12 provides that nothing in the 2000 Regulations affects the operation of Reg. 2 of the 1978 Regulations.

The test under the 1978 Regulations is that of 'direction, supervision and control' and Mr Antell maintained that Better Plc did not have sufficient control over the manner in which Mr Simpson rendered his services. He cited Staples v The Secretary of State for Social Services (CO/1073/84 15 March 1985 Unreported) as authority for the view that "…a person with considerable skill was not subject to direction as to how he should do a job."

There were two further points raised by Mr Antell. The first point appears to be an argument based on there being no obligation on Better Plc to pay Mr Simpson because their obligation was to pay Topper. Applying the dicta of McKenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497 at 5151, which was also relied upon in Montgomery v Johnson Underwood Ltd [2001] EWCA Civ 318, it was argued that there was a need for both the payment of a wage and the provision of work as the obligation on the side of the perceived employer. In this appeal the wage was not paid to Mr Simpson but to Topper and Topper had to be ignored under the 2000 Regulations.

The second argument is based on a case Pepper v Hart 65 TC 421 which is relied upon if legislation is ambiguous, obscure or absurd. Mr Antell sought to rely upon Pepper v Hart to submit the Inland Revenue Leaflet IR56, an Inland Revenue press release PR162/99 and Hansard Debates.

The corollary of Mr Antell's arguments being that as Mr Simpson did not have a contract of service, the 1978 Regulations did not apply to him and that the 2000 Regulations did not apply where there was an intermediary and a non-intermediary such as Topper. Therefore, neither piece of legislation applied to his client's case.

The Revenue's Arguments
Mr Mitchell argued for the Revenue that Reg 6(1)(c) was quite clear and, therefore, Pepper v Hart could not be relied upon. He cited McManus v Griffiths [1997] STC 1089 as authority for the view that it was necessary to concentrate on substance and not form. He then distinguished Professional Contractors Group on the ground that it concerned European Law.

Mr Mitchell argued that Better Plc had complete control over the work of Mr Simpson even though the right may not have been exercised in practice. On the issue of the right of substitution, Mr Mitchell argued that although there was a right it had not been utilised. In addition, as the expertise of Mr Simpson was rare, it may not have been possible to find a suitable substitute.

Issue (1) Do "the arrangements" include those with Topper?

The Special Commissioner began by considering the 'arrangements involving an intermediary' mentioned in Reg. 6(1)(b) and (c). Turning to Reg 5 for the definition of an intermediary, the Special Commissioner concluded that Topper was not an intermediary as defined in Reg 5.

The question then was whether the Regulations could apply to a case where there was both an intermediary and a non-intermediary. The Special Commissioner stated that: "It seems to me that the phrase "arrangements involving an intermediary" is wide enough to include arrangements involving both an intermediary and a non-intermediary; the phrase is not "arrangements with an intermediary" which would exclude arrangements with a non-intermediary."

Having considered that Regulation 6 (1)(b) was sufficiently ambiguous to consult the documents that Mr Antell submitted, the Special Commissioner came to the conclusion that: "…although the primary purpose of the 2000 Regulations is to consider the contract between the individual and the client in cases where there is an intermediary, there is no indication in the Regulations that that primary purpose does not apply in cases where, as well as there being an intermediary, there is also a non-intermediary." This view is also confirmed by reference to the enabling provisions of s.4A of the 1992 Act.

Issue (2) -Would Mr Simpson be regarded as employed by Better Plc?

The second issue considered by the Special Commissioner was whether, had the arrangements taken the form of a contract between Mr Simpson and Better Plc, Mr Simpson would be regarded as employed in employed earner's employment by the client?

To establish this the Special Commissioner looks at whether a person is employed under a contract of employment or under a contract for services as an independent contractor. The Commissioner considers that this is a question of fact.

The first point to be cited was the test propounded by MacKenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497. This was cited as authority for the three conditions that need to be fulfilled if there is to be a contract of service. The next case to be considered was that of Market Investigations Ltd v Minister of Social Security [1968] 2 All E.R 732 where Cooke J proposed the fundamental test of being 'in business on your own account'. It was noted in this case that: "Although control was relevant it was not the sole determining factor when one was dealing with a professional man, or a man of some particular skill and experience, there could be no question of the employer telling him how to do the work."

The Special Commissioner then turned to the case of Hall v Lorimer [1994] STC 23 that: "…there was no single path to a correct decision. The question whether an individual was in business on his own account might be helpful but might be of little assistance in the case of one carrying on a profession or vocation. The Special Commissioner pointed out that: "Factors which were critical in that appeal were the duration of the particular engagements and the number of people by whom the individual was engaged." The Special Commissioner did not, however, point out that the provision of equipment was deemed to be irrelevant in this case.

The last case cited was that of McManus v Griffiths (1997) 70 TC 218 which the Special Commissioner used as authority for the fact that it was necessary to look at the substance of the contractual arrangements rather than the form or the parties labels.

In applying those principles to the facts of the present appeal, the Special Commissioner considered first the factors found which pointed to the conclusion that there was a contract of service.

Those factors were:

Obligation: Mr Simpson agreed to provide his own work and skill for a remuneration to Better Plc and to work the standard hours of 37.5hrs per working week. Any absences of Mr Simpson had to be agreed and approved in advance.

Control of a Skilled Man: It was acknowledged that as a skilled man it would not be expected that Better Plc could tell Mr Simpson 'how' to do his work but that the contract provided that Mr Simpson "…take all necessary instructions from Better Plc and comply with their rules and regulations."

Control through Termination of Contract: The control element was raised again in a novel way which was that Mr Simpson was subject to the Better Plc's control because FSC Ltd's contract could be terminated by Topper immediately if Better Plc terminated its contract with Topper for unsuitability or unprofessional conduct.

Hiring Employees: Mr Simpson did not hire his own employees and the members of his team were mainly permanent employees.

Equipment: Mr Simpson did not maintain or provide his own tools but worked on the client's mainframe.

Hourly Wage: Mr Simpson was paid by reference to the hours worked not by volume.

Risk and Profit: Mr Simpson did not bear any financial risk and had no opportunity to profit. All his invoices were paid.

Mutuality of Obligation: The relationship between Better Plc and Mr Simpson had an element of permanency as it lasted for two and a half years.

Exclusivity: Mr Simpson only worked for one client at a time

Part & Parcel: Mr Simpson was integrated into the structure of Better Plc to the extent that he worked closely with its employees, also the project manager was an employee.

The Special Commissioner then considered the factors which pointed to the conclusion that Mr Simpson was working under a contract for services.

Those factors were:

Intention: The Agreement between Topper and FSC Ltd expressly stated the intention of the parties that the contract was not an employment contract and was a contract for the supply of services only.
Notional Contract: The contract was between FSC Ltd and Topper whereas the Reg. 6(1)(c) of the 2000 Regulations provides that it is the notional contract between Mr Simpson and Better Plc which is relevant.
Holiday/Sick Pay: Better Plc was not obliged to pay Mr Simpson while on holiday or sick.
Mutuality: In theory Mr Simpson did not enjoy job security but, in practice he worked for Better Plc for two and a half years.
Integration: Mr Simpson was not part of the management nor did he manage permanent employees.
Substitution: FSC Ltd had the right of substitution but the right was fettered in that the substitute had to be another consultant who had previously supplied services to Better plc and had to be approved by them. The substitution was never used.
Control: There was little direction or control over Mr Simpson by Better Plc. On the other hand Mr Simpson could not be expected to be controlled because of his skill and experience.

The Special Commissioner concluded that on balance the factors weighing against there being a contract for services was outweighed by the factors for there being a contract of service.

The 1978 Regulations
In considering the 1978 Regulations, the Special Commissioner found that they were still in existence by virtue of Reg 12 of the 2000 Regulations. That if the decision were made under the 1978 Regulations Mr Simpson would not have been subject to the "…supervision, direction and control as to the manner of rendering his services." The Commissioner found that both Reg 2 (2) of the 1978 Regulations and Reg 6(1)(c) of the 2000 Regulations were both effective and a decision could be reached under either or both. The Commissioner, however, decided to reach the conclusion in this case under the auspices of the 2000 Regulations.

The Decision
The Special Commissioner found that under:

Issue 1 the 'arrangements' mentioned in Reg 6(1)(b) & (c) were those involving both the intermediary FSC Ltd and the non-intermediary Topper; and

Issue 2 had the arrangements taken the form of a contract between Mr Simpson and Better Plc, Mr Simpson would be regarded as employed in employed earner's employment by Better Plc.

The appeal was accordingly dismissed.

Commentary
The first issue raised by the appeal was whether the 'arrangements' in Reg 6(1)(b) & (c) could include both an intermediary and a non-intermediary. This was a novel but necessary argument where any ambiguity of the Regulations could be addressed. The point that the Regulation in question said "arrangements involving an intermediary" and not "arrangements with an intermediary" clearly seem to be wide enough to cover an arrangement with an intermediary and a non-intermediary. It seemed to be, however, that the point of this argument was to bring in the 1978 Regulations as they dealt with arrangements where an agency was involved.

The 1978 Regulations have two advantages one, that the test for there being a contract of service is based on direction, supervision and control; and two that the Regulations are still inforce by virtue of Reg 12 of the 2000 Regulations. The test of direction, supervision and control in this circumstance would have been easier to disprove. Indeed the Special Commissioner found that if the decision had been made under the 1978 Regulations Mr Simpson would not have been subject to the "…supervision, direction and control as to the manner of rendering his services."

Despite considering that both Reg 2 (2) of the 1978 Regulations and Reg 6(1)(c) of the 2000 Regulations were both effective and a decision could be reached under either or both, the Commissioner decided to reach the conclusion in this case under the auspices of the 2000 Regulations. The only argument proffered as to why this choice was made was the fact that this issue did not concern the appellant company FSC Ltd, but concerned Mr Simpson and Topper neither of whom were parties to the case.

Being that the Special Commissioner decided that the 'arrangements' in Reg 6(1)(b) & (c) could include both an intermediary and a non-intermediary, and that it would "…not be proper…" for the appeal to be decided on the basis of the 1978 Regulations, the first issue was done away with.

The second issue considered the relationship between Mr Simpson and Better Plc and whether, under the 2000 Regulations, a notional contract of service could be established. In order to do this the Special Commissioner had to consider the tests and factors of employment status.

It must be remembered that under this legislation the Special Commissioner should be looking at both the contract and surrounding circumstances. As to which prevails in the event of a conflict is as yet undecided. For example, if the contract states that the contractor has to abide by the client's rules and regulations, but in practice the contractor cannot be controlled because of their skill and expertise, which fact prevails. The Commissioners and the courts are still not clear on this point, as we shall see.

In applying the principles of the cases stated to the present appeal the Special Commissioner listed the points which weighed in favour of a contract of service and again in favour of a contract for services.

The first case cited is that of Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497. In this case MacKenna J cites three conditions that need to be fulfilled for a contract of service to exist. Firstly, it needs to be understood that the test is based on proving that there is a contract of service not a contract for services. If these conditions are not fulfilled then it is some other type of contract and not necessarily a contract for services. In fact in Ready Mixed Concrete it was found that there was a contract of carriage. Secondly, it was a case involving a semi-skilled delivery driver and with that in mind, some of the factors used would be appropriate to that type of scenario.

Of the first factor, it appears that Mr Simpson did not agree to "…provide his own work and skill…" because there was a substitution clause. In any case it is a service contract and FSC Ltd were providing a service which would be to provide 'work and skill for a remuneration' but that does not make it a contract of employment. As to the standard hours in the contract, in practice Mr Simpson worked flexible hours.

In the second factor, again the practice conflicts with the contract. The contract states that Mr Simpson has to follow instructions but in practice Mr Simpson was brought in to the project to provide his expertise. The Special Commissioner seemed to be applying an argument that the apparent lack of the control element was excusable because Better Plc could not have been expected to have control. Regardless of that argument, Better Plc did not have sufficient control over Mr Simpson. Again the Special Commissioner brings in the control element in the fact that Mr Simpson worked with other employees and that the project manager was an employee. This is irrelevant because he was not doing the same job. Later the Special Commissioner states that: "Mr Simpson did not hire his own employees and the members of his team were mainly permanent employees." It was not Mr Simpson's team, he had no part of management and there was no need to hire his own employees because the contract did not warrant it.

The control factor was raised again in the third factor. This time there was a very novel argument that Mr Simpson was subject to Better Plc's control because they could terminate the contract for unprofessional conduct or unsuitability. There is no case law backing for that statement and in any case, I would suggest that under those circumstances there would have been a breach of contract which results in immediate termination. It has nothing to do with control.

Yet again the provision of equipment is made an issue. Despite the Special Commissioner citing Hall v Lorimer the point made in that case that the vision-mixer did not need equipment and it was therefore not a factor, was not recognised. The provision of equipment is only a factor where the provision of equipment is fundamental to the work done. Here it is not, it is a matter of logistics, mainframe computers are not that portable.

Two further factors which have been misconstrued are 'mutuality of obligation' and 'part & parcel'. The Special Commissioner states that there was an element of permanency in the position. The only case law backing for this was decided at Employment Appeal Tribunal level and has been heavily criticised since. With regards to part & parcel, working closely with the client's employees is not the criteria for integration.

The factors in favour of a contract for services were far more convincing. The expressly stated intention, which was not a false label; the distinct lack of the control element; and the substitution clause. It is irrelevant whether the substitution clause was utilised so long as it was genuine, which in this case it was, although it was fettered to a certain extent.

All in all, it appears that the same old arguments are being used with little or no real understanding of how the employment status test works. Factors are still being used which have long since been criticised in the higher courts. There needs to be more understanding and competent argument based on case law otherwise the outcome at the Special Commissioners will be a foregone conclusion.

The Legislation
Section 75 of the Welfare Reform and Pensions Act 1999 inserted a new section 4A into the Social Security Contributions and Benefits Act 1992 to take effect from 22 December 1999. The Regulations made under the provisions of the new section 4A were the Social Security Contributions (Intermediaries) Regulations 2000 SI 2000 No.727 (the 2000 Regulations) which came into force on 6 April 2000. The relevant parts of Regulation 6 provide:

6(1) These Regulations apply where:

(a) an individual ("the worker") personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client"),

(b) the performance of those services by the worker is carried out, not under a contract directly between the client and the worker, but under arrangements involving an intermediary, and

(c) the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner's employment by the client. "

2(1) In this Part of this Act and Parts ii to v below:

"employed earner" means a person who is gainfully employed ...either under a contract of service, or in an office ...with emoluments chargeable to income tax under Schedule E; and

"self-employed earner" means a person who is gainfully employed ...otherwise than in an employed earner's employment… 2(2) Regulations may provide:

(a) for employment of any prescribed description to be disregarded in relation to liability for contributions otherwise arising from employment of that description;

(b) for a person in employment of any prescribed description to be treated, for the purposes of this Act, as falling within one or other of the categories of earner defined in subsection (1) above, notwithstanding that he would not fall within that category apart from the regulations."