Full decision of IR35 defeat at the Commissioners

We reported last week that the PCG had lost its latest round of battles with the Revenue over IR35. The case of Usetech Ltd was heard at the Special Commissioners, who have now published their full decision.


1. The taxpayer company, Usetech Limited, traded from 1996 to 2003. Its shareholders and officers were William Hood and his wife, but only Mr Hood was actively engaged upon the company's business, and there were at no time any other employees. The company ceased to trade when Mr Hood became seriously ill, and incapable of working. His skills lay in the production of design drawings of oil wells, rigs and similar equipment. In particular, he is, or was, a specialist in the use of a software product known as Pro-Engineer, which produces 3-D models of such equipment. The company's business was, in effect, the hiring out of Mr Hood to various companies engaged in the oil industry.

2. Between 1996 and 2000 Mr Hood undertook work for various companies; in his evidence he identified four engagements. The first was with ABB Vetco Gray ("ABB"). The taxpayer's contract with ABB was effected through the medium of an agency, NES International Limited ("NES"). Mr Hood was interviewed by ABB before it agreed to engage him, although there was at no time any contract between ABB and Mr Hood, nor between ABB and the taxpayer. ABB contracted with NES which in turn contracted with the taxpayer for the provision of Mr Hood's services. The engagement lasted for about 8 months, from June 1996 to February 1997. From then until June 2000 Mr Hood undertook work for companies other than ABB, save for a period of about three months during which the taxpayer was unable to secure any work for him.

3. In May 2000 the taxpayer entered into a further contract with NES for the provision of Mr Hood's services to ABB. The contract was initially expected to be of quite short duration – a matter of weeks – but in fact Mr Hood remained for some 17 months. The taxpayer then secured a further short-term contract with another company before again agreeing with NES to supply Mr Hood's services to ABB; it did so from February 2002 until Mr Hood ceased work in May 2003.

4. Neither the letters nor the agents terms and conditions specified the hours of work – that is, the starting and finishing times, or the number of hours of work required each day, week or month. By contrast, ABB's agreement with NES stipulated that ABB would provide not less than 37.5 hours of work per week. I recognise the force of Mr Smith's argument that neither Mr Hood nor the taxpayer was a party to that agreement, and would not be bound by it – indeed they may have been quite unaware of its terms – and I recognise that the stipulation about hours of work was not repeated in NES' contract with the taxpayer. Mr Hood's evidence was that he determined himself the hours he would work, starting and finishing at times to suit himself and taking holidays when he wished, although as a matter of courtesy he told ABB in advance of his intentions. Flexibility was of some importance to him since he lives in Newcastle but was working at ABB's offices in Aberdeen, staying in lodgings. He stayed in Aberdeen for some weekends, working at ABB's offices, but would otherwise travel home. On some occasions he was asked to work at the weekend, but declined as he had planned to travel home. Conversely, he had no guarantee of work; if, unexpectedly, work he had intended to perform at a weekend was cancelled, or for some other reason there was no work for him to do (he gave the example of ABB's computers crashing), he was sent home or to his lodgings and, unlike permanent, employed staff, he was not paid in those circumstances: he was paid only for the hours he actually worked. Similarly, he did not receive sick pay, or holiday pay.

5. In substance, that evidence coincided with what I was told by Mr Hunter and Mr White, though each said that, while Mr Hood had some flexibility about the hours he decided to work, he was expected to agree those hours with Mr White or the technical manager to whom he reported and, within reason, to keep to those hours. Mr White's evidence went rather further: he said that staff, both permanent and temporary, were normally expected to begin work at 8am and finish at 5pm, but those hours could be extended and Mr Hood had, in fact, worked longer hours on occasion. As a general rule, temporary staff were expected to work 50 hours a week, and Mr Hood did so. If he wanted time off, or to take a holiday, he was expected to seek agreement in advance to his doing so in the same way as would be required of an employee. If the workload were heavy, Mr White said, he might refuse permission but he accepted that if Mr Hood insisted on taking a holiday he could not, in practice, prevent him from doing so, although the situation had never arisen. Both Mr Hunter and Mr White accepted that Mr Hood could be sent home without pay though, without ruling the possibility out, neither recalled an occasion on which it had happened. He would certainly be laid off, with minimum notice, if the project on which he was working came to an end and no other work was available; as Mr Hunter explained, it was ABB's ability to adopt that course which had led it to engage temporary staff through agencies.

6. Some comment was made at the hearing about the fact that Mr Hood was required to complete time sheets, recording the hours he worked, and to have them signed by a suitable member of ABB's permanent staff. I regard that as a matter of no real significance. It seemed to me to be no more than the means by which both he and ABB could record the hours for which he was to be paid, and by which NES could be notified of the hours for which payment was due, since it was through NES that the taxpayer was remunerated.

7. It seemed to me from the evidence that, apart from his not being an employee of ABB, any temporary member of staff was treated, on a day-to-day basis, in a manner barely distinguishable from an employee. He was required to carry a security pass (albeit one identifying him as a temporary, rather than permanent, member of staff) and to attend safety briefings, though these two requirements are not, in my view, of any significance; they seem to be no more than common sense demands. Likewise I find it of little significance that (even if after some time had passed by) Mr Hood became a user of ABB's email system. The fact that he was engaged only temporarily did not diminish the need for communication with him. I also read no significance into the fact that the intellectual property rights in the designs produced by Mr Hood were retained by ABB. Whatever his status, it would in my view be quite remarkable if ABB, having paid Mr Hood (if only indirectly) to produce such designs, had then left him at liberty to sell them to its competitors.

8. More important, to my mind, were the manner in which work was allocated, performed and checked, and the working hours expected of Mr Hood. The evidence showed that work was allocated to the total complement of about 60 engineers and designers available to Mr White at weekly meetings, at which the staff were assigned to project teams. Those teams were led by technical managers, who reported to Mr White. Mr Hood reported to the technical manager to whose project team he was assigned at any given time. Mr Hood was thus expected to, and did, accept those tasks allocated to him at weekly meetings. ABB provided all the necessary equipment including particularly working space at its own premises (where Mr Hood was required to undertake the work) and the computer and software necessary for its performance. Although nominally Mr Hood was engaged on a project-by-project basis, it was apparent from the evidence that he did whatever was required of him, within his skills, as the demands of ABB's business dictated. His work was checked in the same way as that of ABB's own employees, but I do not regard that as a significant factor since the stringent safety requirements ABB and its own customers imposed rendered careful checking inevitable. Mr Hood was at pains to point out that, although he was told what he was required to produce, he was not told by ABB how he should go about doing so. He described his own skills as unique, a view which Mr White did not share although he did accept that Mr Hood needed no instruction and was a highly competent user of Pro-Engineer. I accept that Mr Hood, once allocated a task, was able to accomplish it without guidance or instruction and that none was given or offered by ABB. The point was made that Mr Hood had little or no contact with ABB's customers but since it was not explained whether ABB's employees doing similar work might have had such contact I leave this factor out of account.

9. Mr Smith drew my attention to the requirement in NES' terms and conditions that the taxpayer should take out employers' liability, public liability and professional indemnity insurance, a course which Mr Hood told me he had adopted. Mr Hunter's evidence was that ABB obtained its own insurance, and did not expect temporary staff to provide their own. There was some suggestion, to put it no higher, that NES' conditions were drafted, and adapted as time went by, in order to counter possible arguments by the Revenue that those subject to them came within the IR35 rules, and that the insurance requirement was included as part of that strategy. Even if that is correct, it is in my view unsurprising that NES required a sub-contractor (as it was described) such as the taxpayer to obtain such insurance, for its rather than ABB's protection. I accept it as a factor which points to the conclusion that the taxpayer had some obligations beyond the mere supply of Mr Hood's services, but I do not regard it as a matter of great importance in itself.

10. Of greater potential significance, I think, is the provision in the taxpayer's contract with NES which allowed for the substitution, by the taxpayer, of an alternative worker. The three versions differ slightly in their wording, though in substance all three seem to me to be identical. One version reads as follows:-
"14.4 The Sub-Contractor shall be entitled to substitute alternatives for the Personnel, with the prior written consent of the Company – such consent not to be withheld if the proposed replacement has the appropriate skills, qualifications and abilities in the reasonable opinion of the Client."
The "Company" is NES. The "Personnel", as I have indicated, was identified in the first of NES' letters as Mr Hood, but was not identified in the later letters. Mr Hunter's evidence was that ABB's intention was to secure Mr Hood's services. If he had become unavailable, for example because of prolonged illness, ABB would have heeded his recommendation of a replacement, but the replacement would have been interviewed, as Mr Hood himself and all other temporary staff had been, and taken on by ABB only if he was considered suitable. ABB would have regarded his being taken on not as a mere variation, still less a continuation, of the arrangements by which Mr Hood had been engaged, but as a new contract which, in common with all other engagements of temporary staff, would have been effected by means of an agency. I will return later to the significance of this point, as I perceive it.

11. Mr Hood told me that while he was engaged by ABB he had also undertaken work for two other companies. He had a computer with a copy of Pro-Engineer installed on it (which the taxpayer kept up to date at considerable expense) at his home and he was able to use the computer and the software both in order to undertake work for other clients of the taxpayer, and also to maintain his own skills. He had undertaken the work required by the other companies in the evenings and at weekends. It was apparent that the value of these contracts (in each case, as I accept, entered into by the taxpayer, rather than by Mr Hood personally) was fairly modest – the fee had been about £800 in each case. Mr Hunter told me that he would not have approved of Mr Hood's doing significant amounts of work for other companies while he was engaged by ABB, which wanted his services full-time, but he would not disapprove of his undertaking small contracts, such as these, in his spare time.

12. In this case, whatever the contractual relationship, the reality, as I am satisfied, is that ABB required Mr Hood's services. It was not contracting, indirectly, with the taxpayer for the supply of a person competent in Pro-Engineer; it required Mr Hood. It would not have accepted a substitute, if Mr Hood had sent one, without interview and certainly not on the basis that Mr Hood or his substitute might attend as the taxpayer elected from day to day. Mr Hunter's evidence, which I accept, can lead to no other conclusion than that the arrangement was personal to Mr Hood. I do not go so far as to say that the right to substitute was a sham – Mr Hunter agreed that, if Mr Hood had become unavailable and suggested someone to continue in his place, that suggestion would be given some weight – but Mr Hood and the taxpayer could not dictate, at will, who would perform the work: it had to be Mr Hood. In my view, the "right" of substitution was largely illusory.

13. While I accept that Mr Hood retained some control over the hours he worked, I am satisfied from the evidence that the degree of control he could exercise in practice cannot be materially distinguished from that which one would expect in any fairly senior employee. It was apparent to me that he was, as a rule, expected to work the "core" hours from 8 am to 5pm. Mr Hunter, in particular, made it clear that Mr Hood was expected to work full time for ABB; while the two small contracts he undertook at weekends or in the evening were acceptable, it would not have been acceptable to ABB if he had decided to work on, say, only three days of the week while undertaking other work on the remaining days. I accept that Mr Hood was left largely to his own devices in the manner in which he carried out his work, but that too seems to me to be no more or less than one would expect of any skilled and trusted employee. Mr Hood was taken on by ABB precisely because he knew how to do the work, without the need for instruction or supervision. This is not a factor inconsistent with a contract of service: see Morren v Swinton and Pendlebury Borough Council [1965] 1 WLR 576.

14. The evidence showed clearly that Mr Hood was expected to undertake the work allocated to him by ABB and to do so in accordance with its directions and at times of its choosing. Although in theory he could decide whether or not he would work on any particular project, the reality was that he either accepted the work which was allocated to him, or his engagement was terminated. In that, too, he was in materially the same position as an employee. As I have indicated, I regard the fact that Mr Hood attended safety meetings and office meetings as neutral - it is not, in my view, in any way remarkable that a temporary member of staff, working (as Mr Hood did) in a team should attend such meetings – but, overall, it seems to me that there is no difference of substance between the measure of control exercised over his work by ABB and that it would have exercised over an employee of his status.

15. Mr Smith argued that the element of mutuality of obligation was absent here: Mr Hood may have been required to supply his labour, but ABB was under no obligation to provide work. That, he said, pointed to this being akin to a contract for services rather than a contract of service in which the employer is expected to provide work and, if there is none to provide, must pay the employee regardless. He relied particularly on what was said by Hart J in Synaptek Ltd v Young (Inspector of Taxes) [2003] STC 543 at paragraph 25, and on the concession made by the Revenue in that case "that if, taking the period of the notional contract as a whole, [the client] was under no obligation to provide work, the necessary element of mutuality was indeed lacking for that period". However, because of the concession, the point was not fully argued. Mr Young's response was, in essence, that Mr Smith's contentions overstated the effect of the authorities and, particularly, what was meant by Hart J in Synaptek. I agree. Certainly there must be mutuality of obligation, but that does not imply that the "employer" is required to provide work: so much was made clear by Stephenson LJ in Nethermere (St Neots) Ltd v Taverna and another [1984] IRLR 240; the requirement of mutuality may be satisfied by the obligation, on the one hand, to work and, on the other, to remunerate. That was also the position in the Market Investigations case, to which I have referred, in which the company engaged an interviewer to undertake market research. Work was allocated to her for each of a series of engagements, each engagement being co-terminous with a survey undertaken by the company. The interviewer, though under the general control of the company, could work hours of her own choosing; she was, in effect, required to perform a task rather than work set hours. There was no provision in her contracts of engagement for sick pay or holidays. She was held to be an "employed person"; she was, as Cooke J put it, "employed by the company under a series of contracts of service".

16. In my judgment, whether one asks if the taxpayer, in the context of this engagement, was pursuing a business on its own account, or considers the distinction between a contract of service and a contract for services – tests which in any event overlap to a great extent – the answer is the same: had there been a direct contract between ABB and Mr Hood it would have been a contract of service. I am left in no doubt that ABB was in close control of the work, that it was Mr Hood personally who was required to undertake it and it is quite unrealistic to suggest that, in the relevant period and on the assumption that there was a direct relationship between ABB and Mr Hood, he or the taxpayer was in the course of carrying on a business on his or its own account. The conclusion must be that the notional contract between ABB and Mr Hood was one of service. I can find no factor in the case which is inconsistent with that conclusion.

And with that, the appeal was dismissed.

The full text of the judgement can be found here

Thursday 13th May 2004