Tax – Contracts of employment – Information technology – Provision of services through intermediary – IR35

Dragonfly Consultancy Ltd v Revenue & Customs Commissioners: Ch D (Mr Justice Henderson): 3 September 2008

The appellant company (D) appealed against the dismissal of its appeals against determinations of liability to PAYE income tax for three tax years and a decision in respect of liability to national insurance contributions in respect of the same period.

D’s sole director (B) was an IT systems tester. B held 50% of the shares in D. D was a service company which supplied B’s services to an end-user (C) via an agency. The agency had agreed to supply C with such temporary staff as it might require in the fields of data processing, computing and project management. Pursuant to the agreement, the agency had indicated to C that it intended to supply B’s services as a consultant. The relationship between D and the agency was governed by a series of fixed-term contracts. There was no written contract between D and B. B had worked almost exclusively for C on testing three projects for periods of seven, 22 and nine months respectively. The special commissioner agreed with the respondent commissioners’ view that D was liable to pay national insurance contributions and PAYE income tax under the IR35 legislation contained in schedule 12 of the Finance Act 2000 for income tax and regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000 for national insurance on the basis that, if B’s services had been provided under a contract directly between B and C, B would have been regarded as an employee of C for tax purposes. D contended that the special commissioner had erred in law in: (1) concluding that the right of substitution within the notional contracts would not have been inconsistent with employment; (2) concluding that the notional contracts would have contained provisions conferring on C a sufficient right of control to justify the conclusion that the contracts would have been contracts of service; (3) concluding that the intentions of the parties were irrelevant; (4) directing himself that the relevant dividing line lay between being in business on one’s own account and employment, without taking into account the fact that an individual might be a ‘worker’ rather than an employee.

Held: (1) Whether a relationship was an employment one or not required an evaluation of all of the circumstances. The context was one where the answer to be given depended on the relative weight to be given to a number of potentially conflicting indicia. The presence of a substitution clause pointed towards self-employment, but was not necessarily determinative, Usetech Ltd v Young (Inspector of Taxes) [2004] EWHC 2248 (Ch), [2004] STC 1671 applied. The special commissioner had been entitled to conclude that the notional contracts between C and B would have been for the services of B, and would have provided that he could send a substitute only if C had given notice that that particular substitute was acceptable in place of B for such period as it should specify. A limited right of substitution in those terms would have been compatible with the existence of a relationship of employment between C and B, Express & Echo Publications Ltd v Tanton [1999] ICR 693 CA (Civ Div) distinguished.

(2) On the evidence, the special commissioner was fully entitled to conclude that B’s performance of his duties was subject to a degree of supervision and quality control that went beyond merely directing him when and where to work. In the case of a skilled worker, control over how the work was done would not be expected. Conversely, in the case of a self-employed worker in business on his own account regular appraisal and monitoring of the kind attested to in the instant case would not be expected. The weight and significance to be attached to the evidence was a matter for the special commissioner, and it was open to him to conclude that the nature and degree of the control by C under the hypothetical contract was, on balance, a pointer towards employment.

(3) Statements by the parties disavowing any intention to create a relationship of employment could not prevail over the true legal effect of the agreement between them. In the instant case, the inclusion of a term in the hypothetical contract to the effect that the parties did not intend to create a relationship of employment could not by itself have reasonably permitted the special commissioner to reach the opposite conclusion about B’s notional status as an employee.

(4) In the context of IR35, the only distinction that mattered was whether the notional contract would be a contract of service or not. The special commissioner clearly had that distinction well in mind, and his conclusion that B fell on the employment side of the line was unassailable.

Appeal dismissed.

Andrew Stafford QC (instructed by Nelsons Solicitors LLP) for the appellant; Susan Chan (instructed by in-house solicitor) for the respondents.