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Case Law: Dragonfly Consultancy Ltd v HMRC Commissioners

[2008] EWHC 2113 (Ch)

Point at issue

Whether the Social Security Contributions (Intermediaries) Regulations 2000 and Schedule 12 FA 2000 applied to the engagements in which Mr Bessell provided IT Consultancy Services to the AA through his own service company, Dragonfly Consultancy Ltd.

Date of hearing: 6 June 2008.

Date of decision: 3 September 2008.

Facts

Appeals had been dismissed by the Special Commissioner against determinations / decisions made by HMRC for the Tax Years 2000/01, 2001/02 and 2002/03. The determinations / decisions had been made under the IR35 legislation, on the basis that had there been a direct hypothetical contract between Mr Bessell and the AA that contract would have been one of service. Dragonfly’s arrangements with the AA were provided through an agency, DPP International Ltd.

The appeal to the High Court was only on points of law.

A detailed summary of the facts are included in HMRC’s review of the Special Commissioner hearing.

Contentions

In the High Court the appellant had 4 contentions.

  1. Personal Service / Substitution.

The notional contracts would have contained provisions relating to substitution which would have prevented them from being contracts of service.

  1. Right of Control.

The Special Commissioner should have concluded that the notional contracts would not have contained provisions conferring sufficient rights of control to create a contract of service.

  1. Intention of the Parties.

The intention of the parties should have been taken into account, and if done so the conclusion would have been that Mr Bessell should not be an employee of the AA.

  1. ‘Worker’ Status.

The Special Commissioner wrongly concluded that the relevant dividing line lay between being in business on one’s own account on one side and employment on the other - failing to consider whether a person may be self employed without being in business on own account. The law recognises the concept of an intermediate ‘worker’ status, and the Special Commissioner should have taken account of this concept.

Judgement

  1. Personal service / substitution.

Mr Bessell was named as the Consultant in two of the lower level agreements; however the fact that his name was omitted from the other lower level agreements did not undermine the requirement for his personal service. Henderson J found that Dragonfly was a one-man company, whose raison d’etre was to supply Mr Bessell’s services - therefore it was obvious that the intention of both parties was that it would be Mr Bessell who would provide the services.

The existence of a clause in the lower level agreement demonstrating that a substitute could only be used where the AA had expressly agreed it, and the oral evidence given by AA’s representatives regarding substitution, resulted in Henderson J concluding that the findings of fact were unassailable - amply justifying the Special Commissioners conclusion that each notional contract would have been for the services of Mr Bessell, and that a substitute could be used only if the AA had firstly given notice that a particular substitute was acceptable.

At paragraph 40 of the decision Henderson J referred to the Special Commissioners comment “The AA did not want any competent tester, it wanted Mr Bessell”. Henderson J stated that the only reasonable inference that could be drawn is that any substitution for Mr Bessell would have required the consent of the AA, and such an inference could only be displaced if there was an express provision on the upper level agreement permitting an unfettered right of substitution - however such a provision was ‘conspicuously absent’.

Henderson J also concluded that a limited right of substitution in the terms stated would have been compatible with an employment relationship between the AA and Mr Bessell - as the terms were quite different from the extreme and unqualified right of substitution which the Court of Appeal considered in Tanton.

  1. Control

Henderson J agreed with the Special Commissioner that a schedule supporting the first lower level agreement demonstrated that the consultant provided by Dragonfly was to act under the direct supervision and control of the AA. Although the wording of subsequent schedules was amended, resulting in the final 4 schedules being silent with regard to direction, supervision or control, Henderson J concurred with the Special Commissioner’s view on the schedules. The original intention was contained within the first schedule, and that underlying reality was not intended to change even though the words in subsequent schedules had changed. Henderson J even went as far as to conclude that the wording of the schedules, along with other alterations, may have only been amended for the purpose of considering the hypothetical contract under IR35.

The appellant contended that the clause in the upper level agreement which showed that staff provided by the agency ‘shall be under the full control and supervision of [the AA] on a day to day basis only regarding performance of duties’ was an indication that there was insufficient control for a hypothetical contract to be one of service. The clause, the appellant contended, was akin to the control a householder would have over a self-employed tradesman. Rather than consider this contractual clause in isolation, Henderson J referred to the findings of fact the Special Commissioner had made - both on the oral evidence and also the contractual provisions. Henderson J found that the Special Commissioner was entitled to conclude that Mr Bessell’s performance of his duties was subject to a degree of supervision and quality control which went beyond being merely directed over when and where to work. It was accepted that control over the how in the case of a skilled man is not determinative, however the regular appraisals and monitoring of Mr Bessell went beyond what would be expected of a self employed individual genuinely in business on own account.

It was found that the question of control was not exclusively dealt within the written contractual documents - the question was one of fact for the Special Commissioner, and in the absence of any error of law his findings were found to be conclusive.

  1. Intention of the parties

Henderson J summarised the position, acknowledging that statements by the parties disavowing any intention to create a relationship of employment cannot prevail over the true legal effect of the agreement between them.

It was accepted that, in a borderline case, a statement of the parties intention may be taken into account and may help to tip the balance one way or the other, however in the majority of cases such statements will be of little, if any, assistance in characterising the relationship between the parties.

Henderson J affirmed the added complexity for IR35, as there is no direct contract in place between worker and end client, therefore there is no contract in respect of which both they can have stated their intentions. As the statements of intention made in relation to actual contracts with an agency are directed towards the characterisation of the contract between the worker and the agency, they are of no value in the wider concept.

Henderson J found, however, that as the IR35 legislation requires consideration of the arrangements a statement of intention forming part of the arrangements should not be dismissed without consideration. Henderson J concluded that there may be a suitable case where the statement of intention should be included in a direct hypothetical contract; however even in those cases where such a statement is included the weight to be attached to such a statement would be minimal.

Henderson J concluded that the Special Commissioner had considered the intention of the parties in this case and decided that the statement of intentions were irrelevant in determining whether the engagement was one of service or for services - therefore the hypothetical contract would not have included a statement of the intention of the parties. Even if it was found such a clause were to be included in the hypothetical contract, this could not by itself result in reach the opposite conclusion about Mr Bessell’s notional status as an employee.

  1. Worker status.

The appellant contended that the Special Commissioner failed to consider a third intermediate category - that of ‘worker’.

Henderson J confirmed the general law of employment does not recognise a third intermediate category between employment and self-employment; therefore there was no reason why the Special Commissioner should have considered any other category. In the context of IR35 the only distinction to be made is whether the notional contract is one of service or not - and the Special Commissioner clearly had that in mind.

Henderson J concluded by stating that for the reasons given in his judgement the conclusion that Mr Bessell fell on the employment side of the line is unassailable.

Conclusion

The appeal was dismissed.

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