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HMRC internal manual

Employment Status Manual

Case law: Synaptek Ltd v Young


Point at issueWhether the Social Security Contributions (Intermediaries) Regulations 2000 applied to the provision of services by an IT consultant working through his own service company.

FactsGordon Stuchbury (Mr S) was a consultant in software engineering and he and his wife were the only directors and shareholders of the company, Synaptek Ltd. On 15.12.99, Synaptek Ltd entered into an agreement with an agency, NESCO, under which Mr S was to undertake work for ITSA - DSS at Longbenton. The role of ITSA was subsequently taken over by EDS although the terms of the agreement with ITSA continued to be observed without any material difference.

The agreement of 15.12.99 included the following features:

  • Synaptek Ltd would secure that Mr S carried out the services required by EDS
  • Services to be carried out at DSS building, Longbenton though location could be changed by agreement
  • It was open to any of the 3 parties to terminate the agreement by giving 4 weeks written noticeThe Inspector issued a Section 8 Notice of Decision that the circumstances of the arrangements between Mr S and EDS for the performance of services from 1.5.00 to 29.10.00 were such that, had they taken the form of a direct contract between them, Mr S would be regarded as employed in employed earner’s employment. Synaptek Ltd appealed and that appeal was dismissed by the General Commissioners.

The company appealed against the decision of the General Commissioners by way of Case Stated to the High Court.

DecisionIn the High Court Mr Justice Hart dismissed the company’s appeal.

CommentaryThere were several points of interest in the judgment, which have general application.

The identification of the “arrangements”, and the hypothesising of those arrangements into a contract directly between the worker and the client, by the fact-finding tribunal, the General (or Special) Commissioners, was found to be a matter of fact, or of mixed fact and law. The significance of this point is that the High Court will only overturn a decision of the fact-finding tribunal if that decision was an impossible one on the facts found by them or if the tribunal misdirected itself.

The judge has confirmed the principle established by earlier courts that, although a person may be in business on his own account, a particular engagement may be either a contract of service or a contract for services. (Davies v Braithwaite; Fall v Hitchen; Hall vLorimer)

Mutuality of obligationThere was a clause in the agency-service company agreement which stated that the client would allocate work to the service company and that the service company would in turn allocate work to Mr S. There was therefore an obligation on the client to provide work during the currency of the agreement. In addition there was another clause which provided that the contract could be terminated by any one of the 3 parties by giving written notice of 4 weeks. The judge said “if the contract is read as containing no obligation on the client to provide work, it is quite impossible to see what purpose is served by the termination provisions in Clause 8.” Consequently, where a contract contains such a clause, it is likely to lead to the conclusion that there is the required minimum of obligation over the whole period of the notional contract.

The Revenue’s view on mutuality of obligation remains unaltered. Basically, for there to be a global (employment) contract there needs to be an obligation on the engager’s part to provide work, or perhaps pay a retainer during breaks, and on the worker’s part to accept work offered over the whole period. But where there is no global contact, it is necessary to consider whether the minimum mutuality of obligation exists for each separate (shorter) engagement.

In addition he added that, in considering whether the substitution clause was a pointer to employment or self-employment, “the Commissioners were entitled in my judgment to regard it as simply one fact among others and, in assessing the weight to be given to it, to take into account the extent to which the provision was utilised in practice.” Consequently, where there has been no substitution in practice, the Commissioners may decide that such a substitution clause will carry little weight as a pointer to self-employment.

Principles identified by Special Commissioner in the F S Consulting caseThe judge said that 23 authorities had been cited to the General Commissioners. He considered that the fact that they had referred to the principles identified by Dr Brice in the case of F S Consulting Ltd v McCaul (set out at paragraph 44 to 51 of her Decision) seemed to him to have been no more than an efficient and economical way of encapsulating the relevant principles. By implication he was approving all of those identified by Dr Brice. In the context of IR35, paragraph 51 is important. That paragraph indicates that in constructing the notional contract it is necessary to have regard to substance over form.

The judge listed eight factors pointing to a contract for services and five pointing to a contract of service. This illustrates that the weight of those pointing to employment must have been much greater than those pointing to self-employment. This is in line with the judicial comments made in the case of Hall v Lorimer (66TC349).

Error in Notice of DecisionThe judge confirmed that the General (or Special) Commissioners have the power to amend a Notice of Decision.