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HMRC internal manual

Employment Status Manual

Case law: HMRC Commissioners v Larkstar Data Ltd

[2008] EWHC 3284 (Ch)

Point at issue

The case was an appeal by HMRC against a decision of the General Commissioners which allowed an appeal by Larkstar Data Ltd against a determination by HMRC of liability to Income Tax and NIC under the Social Security Contributions (Intermediaries) Regulations 2000 and Schedule 12 FA 2000.

Date of hearing: 24 November 2008.

Date of decision: 15 January 2009.

Background Facts

  1. Larkstar Data Ltd’s (“Larkstar”) business is ‘the provision of computer consultancy services’.
  2. Mr Alan Brill is the sole director of Larkstar.
  3. Larkstar entered into agreements with the employment agency Technology Project Services International Ltd (“TPS”) to provide services to the end client Matra Bae Dynamics UK Ltd (“MBDA”).
  4. Determinations/decisions were made by HMRC on the basis that had there been a direct hypothetical contract between Mr Brill and MBDA that contract would have been one of service. Larkstar appealed against the determinations/decisions.
  5. The General Commissioners upheld Larkstar’s appeal, rejecting HMRC’s view that the IR35 legislation applied.

Facts found by the General Commissioners and set out in the Case Stated

  1. Larkstar entered into 5 successive six month agreements with TPS for the provision of consulting services to MBDA.
  2. An ongoing project known as ASRAAM, being worked on by MBDA, was the sole purpose of the contracts entered into between Larkstar and TPS.
  3. The work to be done by Mr Brill had to be performed exclusively at MBDA’s premises for security reasons.
  4. Each of the five contracts allowed a substitute to be provided for Mr Brill, however the overriding security arrangements required substitutes to undergo procedures as rigorous as contractors and in practice that did not happen.
  5. Each of the five contracts required Mr Brill to provide his own equipment, but the overriding security arrangements required him to use MBDA’s on-site equipment.
  6. Mr Brill had no financial risk apart from loss of income on premature termination or having to redo unsatisfactory work at his own expense.
  7. Mr Brill was encouraged to work during MBDA’s core hours for the purpose of co-ordinating his work with that of others, but he was free to decide when to work outside those core hours.
  8. MBDA exercised no control over how Mr Brill did his work.
  9. Mr Brill was deliberately set apart by MBDA from their company’s structure so that he could independently analyse, criticise and test their systems. His professional independence was what MBDA hired.
  10. Mr Brill occupied no post and had no title, with his badge describing him as a contractor.
  11. There was no obligation on MBDA to provide work outside or beyond each contract and, if it had been offered, no obligation on Mr Brill to do it.
  12. Mr Brill was free to work for other clients but did not in fact do so.
  13. The engagement could be terminated:
(i) at the end of each contract without notice   

(ii) by either party giving the other one month’s notice within the contract period  

(iii) at the end of the project without notice, as in fact happened.   
  1. There was no provision in the contracts for sickness, holidays, pensions, bonuses or employee’s rights and privileges, such as car parking, sports facilities or medical services.

Grounds of Appeal

HMRC had four grounds of appeal, being the General Commissioners erred in law in that they

  1. Misdirected themselves in law having identified the correct question they did not answer it and applied the wrong test in determining whether or not the arrangements would have amounted to a contract of or for service if they had been entered into directly with the client.
  2. Misdirected themselves in law in their approach to the issues of
(a) control   

(b) mutuality of obligation   

(c) the relevance of a number of considerations to the question they had to determine.   
  1. Took into account irrelevant considerations and based their decision on a number of findings of fact which were either not supported by the evidence or inconsistent with other findings of fact.
  2. Reached a conclusion which was not open to them on the evidence before them.


  1. Sir Donald Rattee found that although the General Commissioners did not express that they were performing their consideration of the point at issue in accordance with that required by the legislation; he was of the view that the General Commissioners had correctly considered the nature of a direct contract between Mr Brill and MBDA. As a consequence of his findings Sir Donald Rattee rejected HMRC’s first ground of appeal.

2(a). Sir Donald Rattee upheld HMRC’s ground of appeal in regard to the General Commissioner’s finding of Control, due to 2 significant aspects.

Firstly, the statement at paragraph 9(b)(iv) of the Case Stated in which the General Commissioners decided that as Mr Brill was a consultant, and there was no control by MBDA as to how he did his work, indicated that he was independent, suggested to Sir Donald Rattee that the Commissioners took no proper account of the authorities referred to at the hearing by HMRC on this aspect - most notably Lord Parker, CJ’s dictum in Morren v Swinton & Pendlebury Borough Council.

Secondly, one of the General Commissioners’ findings of fact was that Mr Brill was encouraged to work during MBDA’s core hours (paragraph 5.6 of the Case Stated). Mr Brill’s own evidence was he was required to work 37 hours a week - adhering to core hours (paragraph 7(4)(viii) of the Case Stated). As the General Commissioners’ found Mr Brill’s evidence to be convincing and to be preferred in all cases of apparent conflict, their finding of fact regarding hours of work was inconsistent, and had they found that Mr Brill was indeed required to work the hours they may have concluded this was a pointer towards employment.

2(b). The General Commissioners found there was a lack of mutual obligation, which they saw as one of the most compelling factors indicating independent contracting. This was found to be a clear misdirection by the General Commissioners on the relevant law as they only considered the obligation to offer work outside the terms of the contracts, which is irrelevant to the question of whether there is mutual obligations during an engagement. In reaching their decision the Commissioners ignored statements of principle by the Court of Appeal in Cornwall County Council v Prater. Sir Donald Rattee found a clear misdirection as to the law by the General Commissioners.

2(c). With the exception of the impact of a termination clause on the hypothetical contract, which Sir Donald Rattee found to be no clear point of law therefore there can be no misdirection, it was decided there was no requirement to review each individual factor under this ground of appeal as there was already a finding of misdirection in law on the fundamental aspects of control and mutuality of obligation.

  1. We accepted that our third ground of appeal added little to ground 3, therefore this was not pursued.

  2. With regard to ground 4, the analogy of a builder chosen by the Commissioners, Sir Donald Rattee found that although the analogy was “not a happy one”, it did not amount to a misdirection in law.


The appeal was allowed and remitted to the General Commissioners to be heard by a different constituted panel, as Sir Donald Rattee could not be satisfied that the Commissioners would have reached the same conclusion had they not made the errors of law and the unjustified finding of fact identified by him.

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