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Employment Status Manual

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Case Law: The Commissioners For HMRC and Talentcore Limited (t/a) Team Spirits

[2011] UKUT 423 (TCC)

Date of Hearing 21-22 July 2011

Point at Issue

The hearing was an appeal by HMRC against a decision of the First Tier Tribunal [2010] UKFTT 148 (TC), which allowed an appeal by Talentcore against determinations and decisions to tax and NICs issued in relation to the application of the agency legislation.

Part 2 Chapter 7 ITEPA 2003;

Section 134 ICTA 1988 (prior to 5/4/2003);

SS (Categorisation of Earners) Regulations 1978 (SI 1978 No.1689) Regulation 2 and paragraph 2 in column (A) of Part I of Schedule 1.

Facts

  • Talentcore is engaged in the supply of individuals (consultants) to major cosmetic companies for counter and promotional work at airport duty-free shops.
  • The consultants are engaged by Talentcore on a self-employed basis.
  • There were no written contracts in place.
  • The facts found by the FTT are set out at paragraph 3 of the UT Decision.
  • HMRC did not seek to challenge the findings of fact in the FTT Decision.

Grounds of Appeal

HMRC had three specific issues on appeal:

  • Liability for NICs: whether the FTT erred in law by allowing Talentcore’s appeal against the Notices of Decision made under s8 of the Social Security Contributions (Transfer of Functions etc) Act 1999;
  • Liability for Income Tax up to 6/4/2003: whether the FTT erred in law in allowing Talentcore’s appeal against the Notices of Regulation 80 Determinations made under Regulation 80 of the Income Tax (PAYE) Regulations 2003;
  • Liability for Income Tax from 6/4/2003 to 5/4/2007: whether the FTT erred in law in allowing Talentcore’s appeal against the Notices of Regulation 80 Determinations made under Regulation 80 of the Income Tax (PAYE) Regulations 2003.

The second and third issue were distinguished as the periods in question are governed by different statutory provisions i.e. s134 ICTA 1988 (up to 5/4/2003) and s44-s47 ITEPA 2003 (from 6/4/2003).

Contentions

HMRCs contentions centred on the requirement for personal service within an agency contract.

For NICs purposes HMRC believed the judge erred in his interpretation of the words “…renders, or is under obligation to render, personal service…” in column (A) of Part 1 of Schedule 1 of the NICs Regulations and in particular, in order to fall within the section, where the FTT concluded that “there must be an obligation on the worker” to render personal service. HMRC submitted that the FTT judge was wrong to conclude on the facts found, that Talentcore’s workers were under “no obligation to render (or provide) personal service.”

HMRC’s view was the FTT wrongly concluded that the words “renders, or is under obligation to render, personal service” could only apply where there was an obligation on the worker to render personal service. HMRC argued it did not matter whether the worker was under an obligation to render personal service if in fact personal service is rendered.

HMRC believed the FTT erred in reaching his decision on the meaning of the 1978 Regulations by having regard to the Explanatory Notes to ITEPA (under Tax Law re-write). ITEPA section 47(1) introduced a definition of an “agency contract” as a contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client. This requirement was not present in the previous agency legislation under section 134 ICTA 1988 (see guidance in Employment Status Manual ESM2011).

The FTT held that the wording of ITEPA “must be implied” into the 1978 Regulations. HMRC argued that the Explanatory Notes were not a permissible aid to the construction of the 1978 Regulations as they did not relate to the Regulations themselves or to the question of liability for NICs at all.

HMRC argued that the FTT further erred in law in interpreting the 1978 Regulations by having regard to the construction of the relevant provisions of ITEPA and ICTA. It was argued that the FTT addressed all three legislative provisions together rather than considering each in its own right and, in HMRC’s view, wrongly took the approach that there was no distinction between the three pieces of legislation.

HMRC submitted that even if the 1978 Regulations should be read as requiring in every case that there should be an obligation to render personal service, regardless of the question whether personal service is in fact rendered, the FTT was wrong to conclude on the facts found that Talentcore’s workers were under no obligation to render (or provide) personal service and in particular HMRC argued the FTT erred in deciding the workers in this case were not under such an obligation when they were actually working.

Upper Tribunal Decision

Personal Service

Having reviewed several authorities which address the subject of substitution, the Mr Justice Roth found that the finding of fact by the FTT (see paragraph 5 of the FTT Decision) was clearly open to it on the evidence. Accordingly, Roth J saw no grounds to disturb the FTT’s findings that the contracts, properly interpreted, contained an unfettered right of substitution.

The Legislation

ITEPA

S44(1)(b) states that the services are to be supplied under the terms of an agency contract. s47(1) provides a definition that an agency contract means a contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client.

Roth J found (agreeing with the FTT) that the terms of the contract did not oblige the consultant to personally provide their services, so it followed that the contract was not an agency contract as defined in s47(1) and as such the agency legislation (s44) did not apply for tax purposes.

ICTA

The provisions under s134 ICTA did not contain a similar definition of an “agency contract” as that in ITEPA.

Roth J, found that the main intention of Tax Law Rewrite programme was to make the legislation clearer and easier to use, with some minor changes to legislation. Under ITEPA , s134 ICTA had been reconstructed into four sections with the increased focus on “the agency contract” but Roth J found there was no intention in ITEPA to narrow the scope of workers falling within the provisions and accordingly his view was that the correct construction of ICTA was to interpret it as having the same meaning as the parallel provisions in ITEPA, so that the “new” law reflected what the “old” law had been.

The 1978 NICs Regulations

The 1978 Regs whilst not identical to ICTA but both pieces of legislation largely mirror each other.

Roth J found that as there was no material difference between the 1978 Regs and ICTA then his reasons for upholding the FTT’s interpretation of ICTA therefore apply equally to the relevant provisions concerning NIC. Moreover Roth J, in agreeing with the FTT, agreed that they should be interpreted consistently with each other.

Supervision, Direction or Control as to the Manner

Talentcore argued that the condition to satisfy supervision, direction or control was not satisfied.

It was found that as the Talentcore consultants were supplied to work on the counter in normal duty free areas they would be working alongside the regular staff and would be subject to the same control as the regular staff which would include control as to the manner in which they carried out the duties.

The FTT found that even though when working on promotions for cosmetics companies there would be little supervision in practice over the consultants, World Duty Free would be in a position to give directions to the consultants. The FTT inferred that if a manager from the cosmetics company was present he or she would have a right to exercise supervision, direction or control over the consultants as he or she would over other retail staff who were employees. Roth J found there was no error of principle by the FTT in the approach they had taken said accordingly the challenge by Talentcore to the conclusion of the FTT fails.

Conclusion

For the reasons given i.e. that the consultants were not obliged to personally provide their services and there was an unfettered right of substitution, the condition at s44(1)(b) was not met therefore the contract was not an agency contract.

The overall position in light of the UT’s decision in Talentcore, is that the existence of a genuinely unfettered right of substitution will mean that the agency is not liable in respect of either income tax or NICs.

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