[2011] UKFTT 411 (TC)

TC01264

Appeal reference: TC/2009/12134

Income tax and NIC – IR35 legislation – worker supplied through intermediary – whether worker was an employee or a subcontractor – a subcontractor – appeal allowed

FIRST-TIER TRIBUNAL
TAX

				                         MARLEN LTD	Appellant

- and -

	THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Lady Mitting (Judge)
	        Rayna Dean (Member)

Sitting in public in Birmingham on 10 January 2011 and 28 March 2011

Mr. Matthew Boddington and Ms. Nicola Smith of Accountax Consulting for the Appellant

Kelvin Shorte of HMRC for the Respondents

© CROWN COPYRIGHT 2011
DECISION

1.	Marlen Ltd has appealed against a decision that a series of engagements under which the services of a Mr. Gary Hughes were provided to JC Bamford Excavators Limited (“JCB”) were subject to what is commonly known as IR35 legislation.  Determinations were made in respect of National Insurance Contributions for the years ended 5 April 2003, 5 April 2004, 5 April 2005, 5 April 2006 and 5 April 2007.  Similarly determinations were also made for income tax for the same years.  The notices and determinations were made on 28 January 2009.
2.	We heard oral evidence from Mr. Gary Hughes and the Appellant also put in an unchallenged witness statement from a Mr. Ken Walton, the international engineering manager for JCB.  The Respondents called no oral evidence.
The legislation
3.	Regulation 6(1) of the Social Security Contributions (Intermediaries) Regulations 2000 provides:
"These Regulations apply where—
(a) an individual ("the worker") personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client"),
(b) the performance of those services by the worker is carried out, not under a contract directly between the client and the worker, but under arrangements involving an intermediary, and 
(c) the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act [the Social Security Contributions and Benefits Act 1992] as employed in employed earner's employment by the client."
"Intermediary" is defined in Regulation 5 and it is common ground that the Appellant is an intermediary for this purpose.
4.	Similar provisions applying for PAYE purposes are contained in Schedule 12 to the Finance Act 2000 and Part 2, Chapter 8 Income Tax (Earnings & Pensions) Act 2003.:
"1—(1) This Schedule applies where—
(a) an individual ("the worker") personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client"),
(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary"), and
(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client."
5.	 The approach to be taken by the Tribunal has been set out by His Honour Stephen Oliver QC in the IR35 case of Tilbury Consulting Ltd v Gittins [2004] STD (SCD) 72:
“The legislation calls for a two stage exercise.  The first is to find the facts as they existed during the period covered by the decision.  The facts to be found are those that serve to identify the “arrangements” involving the intermediary and the circumstances in which those arrangements existed and the nature of the service performed by the “worker”.  The second is to assume that the worker was contracted to perform services to the client and to determine whether in the light of the facts as found (the worker) would be regarded as the (client’s) employee.”
6.	The issue to be determined by the Tribunal therefore is whether, had the arrangements taken the form of a contract between Mr. Hughes and JCB, Mr. Hughes would have been regarded as employed by, ie an employee of, JCB.
The evidence
7.	Marlen Ltd (“Marlen”), of which Mr. Hughes is the sole director and shareholder, was incorporated in 1989.  It provides its clients through various agencies with the engineering, design and drafting services of Mr. Hughes.  In 2002 Marlen registered with an agency, DDC Precisions Ltd (“DDC”), through which Mr. Hughes’ services were supplied first to a company called Compact Products Ltd (a satellite of JCB) in Cheadle, Staffordshire, from April 2003 to January 2004, and then for JCB itself at its Rocester site from February 2004 to April 2007.
Contractual arrangements
8.	There is no written contract between Mr. Hughes and Marlen.
9.	In April 2003, JCB and DDC entered into an arrangement whereby DDC became the “sole preferred supplier to JCB for contract engineering resources”.  This arrangement was evidenced by a single-page agreement dated 5 March 2003 under which DDC was given two working weeks to fulfil each request from JCB.  The requests from JCB were subject to a set of JCB’s “Conditions of Purchase”.  This eight-page document was in no way personalised, referred to supplies of goods and services and contained no clauses of particular relevance to the determination of the issues before us.  We were also referred to an Agreement between DDC and JCB dated 2 April 2007 (ie post-dating the periods under appeal).  This Agreement sets out very fully the terms and conditions governing the supply by DDC to JCB of contract personnel, but no evidence was given as to whether this was the first such contract or a replacement for earlier ones and we therefore cannot say whether the contractual terms set out would have been in force during the periods under appeal.  We therefore take no account of the terms of this contract.
10.	Each engagement which DDC procured for Mr. Hughes was offered by DDC to Mr. Hughes by way of a Purchase Order letter.  This was in the form of a personal letter to Mr. Hughes from DDC beginning:
“We have pleasure to advise the following purchase requirements referring to the above purchase order subject to the attached Terms and Conditions of Contract for Services.”
The letter set out the description of the role as “engineering resource support” and the commencement and completion dates.  The first engagement with Compact Products Limited was covered by four such contracts running from 31 March 2003 to 6 February 2004, the first three for three months each and the last one for four weeks.  The second engagement with JCB was covered by nine contracts, again running continuously but for varying numbers of months.  The evidence which we heard from Mr. Hughes, and supported by Mr. Walton in his witness statement, was that towards the end of each of the contract periods, Mr. Hughes would speak to Mr. Walton to see if he was to be offered a renewed contract.  JCB was under no obligation to offer an extension or a further contract but given the volume of the work, a contract was on each occasion offered and accepted.  Mr. Hughes would inform DDC who would then liaise with JCB and Mr. Hughes to generate the relevant paperwork.  Mr. Walton stressed that Mr. Hughes would not expect further work from JCB automatically, which is why he continued to ask for work.  Mr. Walton describes speaking to the contractors about a month before their project is to end to see if the contractor had anything else lined up or if they were clear for, say, another six months.  He stressed that any arrangement had to be agreed with DDC.
11.	The final contract with Compact Products Limited commenced on 5 January 2004 and was due to end on 5 February 2004.  However, Mr. Hughes was given notice under that contract on Monday 20 January that his final working day and last paid day of work was to be Friday 25 January.  The early termination was said to be as a result of a budget deficit at Compact Products.  Mr. Hughes was then out of work for two weeks before being offered his first contract with JCB.  Mr. Hughes terminated the engagement with JCB by serving one week’s notice to take up a contract on higher pay with Rolls Royce.
12.	We were referred to two written contracts between Marlen and DDC dated 6 – 8 February 2004 and 28 March 2004 respectively.  The terms which are relevant to this case were in each version identical.  These documents were headed “Terms and Conditions of Contract for Services” and were the terms and conditions referred to in the engagement letters.  The relevant terms and conditions included the following:
•	Marlen was obliged to complete the services provided within any agreed timescale and was to devote such time as might be necessary for the proper performance of the services.
•	Marlen was obliged to perform the services with reasonable care and skill - rectification of unsatisfactory work being at Marlen’s cost.
•	Marlen was to provide DDC with progress reports.
•	Marlen was to ensure that its personnel observed health and safety regulations at the premises where the services were being carried out.
•	In case of illness or injury to Marlen personnel, Marlen was to report the matter to DDC.  Marlen was obliged to provide a suitably qualified replacement, incurring any additional training costs.
•	If DDC or the client considered any of Marlen’s personnel unsuitable, there was provision for either an agreed replacement or termination of the contract.
•	DDC undertook to make all reasonable efforts to arrange access to the client’s premises and to make available information necessary for Marlen to carry out the services.
•	The services were to be carried out at a location agreed between DDC and Marlen.
•	DDC was to pay Marlen monthly.
•	DDC was not obliged to offer future contracts to Marlen and Marlen was under no obligation to accept future contracts offered by DDC.
•	Marlen was entitled to enter into contracts with other parties, other than the client provided by DDC.
•	Nothing in the contract was to make Marlen and DDC partners or to make Marlen personnel employees of DDC.
•	Marlen and its personnel were excluded from any right against DDC or the client in respect of employment protection legislation and benefits etc.
•	The contract could be terminated by one week’s notice.
•	Marlen was obliged to carry its own public liability and professional indemnity insurance.
•	There were the usual provisions about indemnity and intellectual property rights.
13.	The documentation referred to above therefore sets out the contractual arrangements.  The practical arrangements of Mr. Hughes’ role and the circumstances of his engagement, we gleaned from the following :
1.	Mr. Hughes’ oral evidence
2.	Mr. Hughes’ witness statement
3.	The unchallenged witness statement of Mr. Walton
4.	The notes of an interview between Mr. Forster of HMRC and Mr. Walton dated 20 June 2008, annotated and agreed by Mr Walton
5.	A written response dated 19 October 2007 from Mr. Hughes to HMRC answering various questions raised of him
6.	A written response from Mr. Walton dated 21 May 2007 to HMRC answering various questions raised of him
We do not refer in detail to all of these documents but extract the relevant information and note the odd points of contradiction.
The nature of Mr. Hughes’ work
14.	The purchase orders from DDC to Mr. Hughes referred to the provision of engineering resource support, further defined as mechanical design engineering expertise or checking expertise.  Mr. Walton said that Mr. Hughes would have been engaged for a specific contract.  This accorded with Mr. Hughes’ evidence that he would normally at any one time have been working on one particular project, for example the development of a machine to be marketed in Brazil which required an engine to be fitted, the parts of which had to be 60% locally sourced in Brazil.  Mr. Hughes could however be asked by JCB management to drop whatever he was doing and attend to another job if an emergency arose which required attention or which requires a skill which he was thought to possess.  In the main Mr. Hughes worked in the Development Department but agreed on occasion to work on projects within the Production Department.  The evidence of Mr. Walton (paragraph 21, witness statement) and Mr. Hughes’ oral evidence was that JCB used its contractors for two purposes.  One was to provide a skill or an aptitude which the employees did not necessarily possess, or secondly to “smooth out overloads where resource requirements exceeded availability”.  This accorded very much with Mr. Hughes’ oral evidence that he personally was not brought in to apply a specific skill or expertise which JCB did not already have in house.  His evidence was that the employed senior design engineers would all have an equivalent degree of skill and expertise to his own, but his recruitment arose out of a shortage of such skilled manpower on specific projects.
Substitution
15.	The evidence as to substitution was confused.  The contract between Marlen and DDC clearly provides (paragraph 4.11) that the contractor (Mr. Hughes) is obliged to provide a suitably qualified replacement in the event that he is prevented by illness or injury from performing his services.  Mr. Hughes, in his witness statement and in his oral evidence, confirmed this, saying that he had the right of substitution; where he acquired the substitute from was up to him, and if he could not find someone suitable he would then have approached DDC.  Mr. Hughes would have paid the substitute direct.  It is equally clear and indeed undisputed that Mr. Hughes never did appoint a substitute.  There is in fact no evidence that Mr. Hughes was ever off through illness or injury or for a sufficient period for the need for a substitute ever to arise.  Mr. Hughes was asked by Mrs. Dean if he had considered appointing a substitute when he terminated his contract, to which he replied that he had not as he then considered that the contract and all his obligations under it were at an end, the contract having been to provide Gary Hughes.
16.	Mr. Walton’s evidence is somewhat at variance with this arrangement.  At paragraph 23 of his witness statement he sets out that JCB would give DDC its requirements.  He would not have accepted a substitute from Mr. Hughes, but that if a situation had arisen where Mr. Hughes has been unable to provide the services then he, Mr. Walton, would have contacted DDC to provide someone else with the same skill set.  Mr. Walton saw his contract as being with DDC to provide someone suitable to do the job.  Further, in his interview with HMRC, Mr. Walton was asked if Mr. Hughes had been unable to attend personally whether he was obliged to offer a substitute.  Mr. Walton replied “definitely not” and that no substitute had been provided in practice.  He stated that Mr. Hughes had never offered a substitute and had he done so one would not have been accepted.  He did however go on to say that if Mr. Hughes had been absent for a month or more, then Mr. Walton would have gone back to DDC for a replacement contractor.  To be noted here is that when Mr. Walton was asked to sign the interview note, Mr. Walton added in the following manuscript note which we set out in full:
“On this particular issue it may have more to do with Mr. Hughes’ contract with DDC which I have not seen.  Our arrangement is with DDC and they get the personnel and recommend candidates that they feel are suitable for JCB’s requirements.  If there is a long term absence then this would be a matter between DDC and Mr. Hughes to find a replacement.”
17.	Without the benefit of hearing and probing this in more depth with Mr. Walton, we take the view that Mr. Walton’s note in fact probably solves the contradiction.  As far as JCB was concerned, its arrangement was with DDC, to whom they would look to fulfil its needs.  If JCB felt that the need for a substitute had arisen it would be to DDC whom they would go.  However, as between DDC and Mr. Hughes, Mr. Hughes had taken on the contractual responsibility for finding and funding a replacement for himself.  There is no evidence and no suggestion is made that Mr. Hughes was ever absent from work for long enough to justify the recruitment of a substitute.  Again it should be noted that in paragraph 23 of his witness statement, Mr. Walton states that he never expected Mr. Hughes “to give his personal service to carry out the job”.  JCB would give DDC its requirements and would expect DDC to match them.
Mr. Hughes’ hours of work and working arrangements
18.	This is another area where there is an apparent conflict of evidence between what is set out on paper and what appears to have happened in practice.  In Mr. Walton’s written response of 21 May 2007, the question is asked “whether or not the hours of starting and finishing were fixed, and if so the daily times”.  Mr. Walton’s response is that there were fixed hours Monday to Thursday, 8:30am to 5:00pm and on Friday 8:30am to 4:00pm with 30 minutes’ lunch each day.  The next question was whether the number of hours worked each day or days per week and whether or not the worker was free to vary them without permission.  Mr. Walton’s response was that “hours worked in accordance with above.  Permission given to work the fixed shutdown”.  In his interview with HMRC, Mr. Walton refers to the working hours as being set in stone but does also refer to them as the “minimum hours required to fit in with employee’s work times”.
19.	This in fact is in contradiction not only with Mr. Hughes’ own evidence but also with Mr. Walton’s description of what happened in practice.  Mr. Hughes’ evidence was that the employed staff’s core working hours were indeed 8:30am to 5:00pm and he understood that he was expected to work a basic 39 hour week, but in practice this rarely happened.  Such was the volume of work Mr. Hughes would almost invariably work a greater number of hours.  Equally, he never worked fixed hours but would start work earlier - at around 7:30am – and would leave later.  On Fridays (72 out of 90 in his first two years with JCB) he normally left at 2:00pm.  This flexibility was something that was not open to the employees.  First, Mr. Hughes told us that he could work whatever hours he wished without seeking permission, although he would as a matter of courtesy tell the management.  Secondly, if any employee wanted an afternoon off he would be expected to not only obtain permission but also to make up the time.
20.	There is documentary support for Mr. Hughes’ evidence in various JCB-generated documents which we saw.  These list Mr. Hughes’ working hours in any given week and we note for example that in week ending 6 June 2004 he worked 34.5 hours; week ending 5 September 2004 he worked 44 hours; week ending 12 September 2004 30.5 hours; week ending 19 September 2004 42.5 hours and week ending 26 September 2004 42.5 hours.
21.	In Mr. Walton’s interview with HMRC he adds an additional manuscript note at the end as follows:
“Mr. Hughes was a conscientious worker and as stated there was plenty of work so invariably he would come in early and go later than the fixed hours to ensure the work was done.  On some days he would arrive later or leave earlier.”
22.	In his witness statement Mr. Walton repeats that when a project began JCB would tell DDC the general hours of work “although Gary was always in before me and left after me” (paragraph 19).  We find as a fact that, in practice, Mr. Hughes did not work the fixed hours laid down for employees but hours of his own  choosing, and that he did so without having to seek permission but that he did as a matter of courtesy inform Mr. Walton or his project manager.  It may well be that this arrangement worked and was allowed to work because it was clear to everyone that Mr. Hughes did not take advantage of this flexibility and in any event worked in excess of the core hours.  It could have been that if a contractor had been found to be under-performing he would have been reined back into the set hours, but this was not the case with Mr. Hughes.
23.	Mr. Hughes told us - and this was confirmed by Mr. Walton – that there were at least a couple of occasions when the computer servers broke down and the contractors were sent home, without pay, whereas the paid staff were not sent home.
24.	JCB, being a manufacturing plant, had set holidays, one week in May and three in July / August when the whole manufacturing plant closed down and the entire paid staff, with the exception of the maintenance and security staff, took their holidays.  This was inflexible and all employees took their holidays within the compulsory shutdown.  The only flexibility within the system was that in reward for long service employees were given, on a staged basis, one day’s extra holiday as a “service day”.  None of this applied to Mr. Hughes.  He worked throughout the time the plant was closed down and took his holidays whilst the plant was operational.  He did not have to seek permission but again would tell the management as a matter of courtesy.  At no time was permission ever refused to Mr. Hughes to work the hours he wished or to take the holidays he wished.
25.	It was the evidence of both Mr. Hughes and Mr. Walton that the contractors worked within teams with the employees.  They sat with them and there was no physical demarcation between them.  Mr. Hughes was provided with a desk, a computer, a phone line and email access, his email address being given g.hughes@jcb.com.  The rest of Mr. Hughes’ equipment he took in himself – a calculator, micrometer, a steel rule and a measuring tape.  There was a stationery cupboard which he, as a contractor, was not allowed to access.  Apart from a high-visibility jacket, Mr. Hughes, unlike employees, had to provide his own clothing – fleece, safety shoes, woolly hat and a waterproof jacket.
26.	The JCB computer operating system used by Mr. Hughes could only be used on site and he would not be allowed to bring his own systems into work or take any work home.  Contractors were not allowed, for security reasons, to work off-site, and indeed, as Mr. Walton pointed out in his statement, the way in which Mr. Hughes’ drawings were moved in the server was so complex that it was for this purely practical reason that work could only be done on site.
27.	The contractors received no induction.  Mr. Walton stressed that unlike employees, they were given no training.  The training given to employees was lengthy, as befitted the extremely complex operating systems being used, but the contractors were expected to have all the necessary skills and knowledge to be able to operate the system without training and to be able to work, again without training, to the company and statutory legal standards.  The contractors accessed the buildings, as did the employees, by simple swipe card, this being part of the site security system.  There were a number of miscellaneous benefits which the employees enjoyed but which were denied to the contractors – free canteen meals; membership of the company social club; entry into the private medical and dental scheme and access to the on site doctor and nurse; subsidised use of the gym facilities; participation in the bonus scheme.  Equally the contractors received none of the usual employment benefits of holiday pay, sick pay, or membership of the pension scheme.  They were not covered by the company’s grievance or disciplinary procedure but equally did not participate in the appraisal scheme.
Financial arrangements
28.	Mr. Hughes at the commencement of his contracts would agree with DDC an hourly rate of pay, and he was throughout paid for the hours worked, nothing more, nothing less.  He had no knowledge of the financial arrangement between JCB and DDC.  Mr. Hughes maintained a weekly timesheet which he had signed off by JCB management at the end of each week.  There was no occasion when the accuracy of his timesheets was challenged.  The timesheet would be faxed through by Mr. Hughes to DDC who would then invoice JCB in accordance with the contractual arrangements within the two companies.  As far as Mr. Hughes was concerned he would, on a monthly basis, generate his own invoice for the total number of hours worked, which he would submit to DDC, who paid him on receipt.  He accepted in cross-examination that other than DDC refusing to pay him, he in fact ran no financial risk.
Supervision / control
29.	This was another area where there was an apparent conflict of evidence.  It was common ground between Mr. Hughes and Mr. Walton that at the outset of a job, Mr. Hughes would be briefed by the project or engineering manager.  They would outline exactly what was being built, what Mr. Hughes’ role was to be and what was expected of him.  He would then use his own knowledge and skill to design his particular part, get it manufactured and ready for testing and development.  In interview with HMRC, Mr. Walton stated that a contractor “would be under the control of the project leaders… who would brief the contractor”.  It should be noted however that this was in response to the specific question as to how Mr. Hughes would know what work JCB wished him to undertake.
30.	We see Mr. Walton’s evidence as being very much in line with Mr. Hughes’ oral evidence, which was that the only form of real control exercised over his work was by Mr. Walton “overseeing the project and checking on progress”.  The way in which Mr. Hughes carried out the work and the priority which he gave to different aspects of it were not of concern to JCB but were a matter entirely for Mr. Hughes.  Mr. Hughes likened Mr. Walton’s role to that of a householder monitoring the progress of an extension being built by professional builders.  That householder would be interested in the progress of the extension, would be ensuring it was running to time, but would have no input into how it was being built.  Mr. Walton, according to Mr. Hughes, would not in any event have been able to exercise any practical control as he would not have the necessary degree of knowledge or skill or be able to access Mr. Hughes’ computer, which was subject to a personal password.  We believe it may well be useful at this stage to incorporate within this decision three paragraphs of Mr. Walton’s witness statement which in effect sum up on the position as Mr. Walton saw it:
“17. At the beginning of a typical project the principle engineer would sit down with Gary and explain what needed doing.  Gary would decide how to do the job using standard industry guidelines books of the material that were available and steel standards as only certain nuts and bolts can be used on JCB machines.  For example if Gary would be require to maybe design a part of a digger arm this would not be the whole arm just a small part of it.  How he actually designed it was for him to decide using his own skill and knowledge.
[…]
32. During the period Gary was working at JCB once Gary accepted the project it was down to Gary to break down the project requirements and design the different parts.  There were different parts of machines to design and each guy had a different way of working.  The total machine design would be an assembly of these different pieces of work which would all come together at the end.
33. There is no standard way of working as each individual uses his / her own calculations and method of working.  How Gary got to the end result was down to him.  None of the contractors have been taken on to do the total machine conceptual design work.”
31.	The conflict in evidence in fact comes between Mr. Hughes’ oral evidence and what he wrote in response to questions from HMRC.  The question he was asked was the frequency with which he had to report, to which he replied “daily discussions were held to discuss the progress of the project”.  He went on to say that he would provide technical details of the design.  However he also went on to say that he was not monitored or controlled on the services provided, merely having to apply JCB and European standards.
32.	Mr. Hughes was unable to explain why he had written that there was daily reporting as there just wasn’t.  Subject however to this, we do not see there is a major discrepancy.  It is clear from Mr. Walton and from Mr. Hughes that the work to be done was handed down by the project manager who briefed Mr. Hughes, as indeed he would have to otherwise Mr. Hughes would not have known what he was expected to do.  However beyond that, it was up to Mr. Hughes to carry out the work in the way which he saw fit.  This is also supported by a manuscript note which Mr. Walton made to his interview with HMRC:
“To clarify further how the work was handed out.  After a brief with the project manager or engineering manager, Mr. Hughes would be left to get on with the work.  The manager would oversee the project to check what progress was being done.  The way the work was done was up to Mr. Hughes as long as he worked within the agreed deadlines and health and safety guidelines.”
33.	It was common ground between Mr. Walton and Mr. Hughes that although Mr. Hughes was engaged initially on a particular project, he was on occasion asked to move to other jobs and he never refused, although Mr. Hughes told us that in practice he could have done had he wished to.  Mr. Walton clearly believed that he had the authority to reassign Mr. Hughes to any other project within his unit, and he was indeed asked on occasion by management to help solve any unexpected problem which might arise.
Case law
34.	We were referred by the parties both orally and in their opening and supplementary closing skeleton arguments to a number of cases which have been the subject of analysis in many tribunal decisions.  We do not propose to repeat that analysis here but would reassure both parties that we have considered all the passages in all the cases to which we were referred, and the mere fact that we do not repeat a reference in this decision does not indicate that it has been overlooked.  The widely accepted approach to determining employment status, which was adopted here by both parties, can be found in the judgment of MacKenna J. in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 at 515:
“A contract of service exists if these three conditions are fulfilled.  (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of service for his master.  (ii) He agrees, expressly or impliedly, that in the performance of that service, he will be subject to the other’s control in a sufficient degree to make that other master.  (iii) The other provisions of the contract are consistent with its being a contract of service.”
35.	In Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 Cooke J stated at (184-185):
“… the fundamental test to be applied is this: “Is the person who has engaged himself to perform these services performing them as a person in business on his own account?”  If the answer to that question is “yes,” then the contract is a contract for services.  If the answer is “no,” then the contract is a contract of service.  No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases.  The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.”
36.	In Hall v Lorimer [1992] STC 599 Mummery J stated at (612) (in a passage approved by Nolan LJ – [1994] STC 23 at (29)):
“In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person’s work activity.  This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation.  The object of the exercise is to paint a picture from the accumulation of detail.  The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole.  It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details.  Not all details are of equal weight or importance in any given situation.  The details may also vary in importance from one situation to another.  The process involves painting a picture in each individual case.  As Vinelott J said in Walls v Sinnett (Inspector of Taxes) [1986] STC 236 at 245: “It is, in my judgment, impossible in a field where a very large number of factors have to be weighed to gain any real assistance by looking at the facts of another case and comparing them one by one to see what facts are common, what are different and what particular weight was given by another tribunal to the common facts.  The facts as a whole must be looked at, and a factor which may be compelling in one case in the light of the facts of that case may not be compelling in the context of another case””.
37.	The need for mutuality of obligation and of control have been referred to as “the irreducible minimum” in any contract of employment.
Submissions
38.	We now set out the advocates’ arguments and our own considerations and conclusions on the various elements which go towards painting the picture in this case.  Again, as in our reference to case law, we should say the advocates very helpfully made lengthy oral and written submissions.  These have all been carefully considered and the fact that we have not expressly included in our decision any particular submission does not mean we have overlooked it.
Mutuality of obligation
39.	Although Mr. Hughes’ engagement with JCB lasted from 31 March 2003 to April 2007 (less the two-week period when he was out of work following the early termination of his contract with Compact Products), the engagement was made up of a number of short-term contracts.  It was submitted by Mr. Shorte and accepted by Ms. Smith that there could be mutuality within the individual contracts despite there being no long-term or ongoing mutuality.  This is clearly correct as JCB were under no obligation to continue to offer Mr. Hughes a further contract every time an existing one came to an end, but this does not affect the position under each individual contract.
40.	In putting forward his own submission, Mr. Shorte adopted the summary of case law set out by Judge John Clarke in J and Littlewood v Revenue & Customs [2009] UKSPC 00733 at paragraphs 57 to 84.  Mr. Shorte contended that the JCB recruitment process involved identifying the work to be done and the suitability of the individual contractor before a contract was offered to DDC.  DDC accepted the work and supplied Marlen to do it.  For each period of engagement there would have been an offer of work, an agreement to do that work and an agreement to pay for it.  Mr. Shorte went on to contend that the hypothetical contract would contain a requirement to provide Mr. Hughes personal service; there would be consideration paid for the provision of that service and there would be a period of notice required to terminate the contract.  Consequently, Mr.  Shorte submitted, the irreducible minimum of obligation was present.
41.	It was Ms. Smith’s contention that there was no mutuality of obligation within any of the individual contracts.  She cited the fact that Mr. Hughes was sent home when the computers were down; the early termination of the contract with Compact Products and Mr. Hughes’ early termination of his final contract with JCB.
42.	It appears to us that Ms. Smith is correct in her view.  Mr. Shorte’s submission that within each contract there was “an obligation on JCB to provide work, or at least to pay for it, and on Mr. Hughes to undertake the work” is not borne out by the facts.  When the computers were down the employees remained in place and were paid, whereas Mr. Hughes was sent home, crucially, and this was accepted by Mr. Walton, unpaid.  Both parties terminated a contract partway through.  The contract with Compact Products was terminated because of a budget deficit.  Mr. Hughes terminated his own contract with JCB when a better offer came up.  In sending the contractors home when the computers were down, it appears to us that JCB demonstrated that it did not consider itself to be under any obligation to provide work or pay even after an offer had been made and accepted.  Both parties demonstrated by their conduct in terminating contracts midway through their belief that these contracts could be terminated at any time without consequence.  That this happened is not consistent with a relationship in which mutuality of obligations is present.
Control
43.	Both advocates referred to the tribunal to the words of MacKenna J in Ready Mixed Concrete that control in this context means the power of deciding the thing to be done, the way in which it should be done, the means to be employed in doing it, the time when and the place where it shall be done.
44.	It was Mr. Shorte’s submission that Mr. Hughes was under a large degree of control.  Mr. Shorte saw Mr. Hughes as a resource used by JCB as they saw fit – in reality no different from an employee.  He pointed to Mr. Hughes’ acceptance that he brought no particular skill not already possessed by the senior employees.  He reminded us of Mr. Walton’s view that Mr. Hughes was under the control of the project leaders and that by his own admission Mr. Hughes told us he had to report daily.  Further, Mr. Hughes had accepted that he would take instructions from the senior designers who “were very clear what they wanted”.  Mr. Hughes had to carry out his work in JCB’s premises, not being allowed to take it home.  Mr. Shore also referred us to Mr. Walton’s initial statement that Mr. Hughes had to work fixed hours and that he could be reassigned to other projects.  JCB, contended Mr. Shorte, defined what was to be done, where the work was to be done and the time within which it had to be completed.  His progress was at all times monitored and such was the degree of control that it could only lead to the conclusion that this was a contract of service.
45.	Ms. Smith, adopting the words of MacKenna J, stressed that the control had to be substantial enough to render the worker the servant of the master, and it was her submission that control to that degree did not exist here.
46.	The degree of control that is exercised has to be looked at in the context of what is being done, what is being produced.  There is no absolute standard which can be universally applied.  Mr. Hughes was working on but one small part of a very much larger project.  As Mr. Walton pointed out – “the total machine would be an assembly of these different pieces of work which would all come together at the end”.  They couldn’t possibly “come together” if there was not a measure of control over precisely what Mr. Hughes was producing.  His work had to be coordinated and fitted into the greater whole.  Every part that was being produced for any particular machine was interdependent with every other part.  Equally JCB would have time limits to meet – time limits which had to be passed down to their contractors and employees alike.  Every single person employed and contracted had to work together to produce a specific machine within a specified timeframe.  This could only be achieved by a reasonably rigorous direction and supervision by senior management.  We believe that in reality, the degree of supervision and direction exercised over what Mr. Hughes was doing would be broadly similar to that exercised over all the other contractors and senior employees simply because the nature of the project demanded it.  We got the impression that the senior employed designers worked in very much the same way as Mr. Hughes – being told what needed to be done and then left to use their skill and knowledge to design it.  In summary therefore, when we look at “the thing to be done” and “the way in which it shall be done” we find that management dictated what had to be done, but the way in which he did it was very much down to Mr. Hughes, but having said that we believe that this would be no different from the way in which similarly qualified senior employees worked.  This similarity extends to an examination of where the work had to be done.  Mr. Hughes had no latitude in this.  He could not work at home but had to work on site – the only practical place to carry out such work.  
47.	However, as McKenna J made clear, there are other aspects to control and it is in an examination of these that a clear distinction can be drawn between employees and contractors and as a contractor Mr. Hughes was subject to markedly less control than employees.  No employee had Mr. Hughes’ flexibility of working hours.  In practice he came and went virtually as he wished, advising management only as a matter of courtesy.  No employee had the ability to take a Friday afternoon off or work through the mandatory staff holidays when the plant was closed down.  No employee could take holidays when he wished.  Mr. Hughes went through no induction process and was not subject to appraisals.  He was not subject to the company’s disciplinary or grievance procedures.  He was under a contractual obligation to rectify errors at his own expense.  Examining the question of control as a whole and putting together all the individual factors which make it up, we conclude that Mr. Hughes was not subject to the degree of control which would be necessary to constitute a contract of employment.  The control to which he was subject was significantly less than that exercised over employees and demonstrates a clear distinction between the two.
48.	We pause here to review our findings so far.  We have considered two factors – mutuality of obligation and control.  These are the two factors which make up the irreducible minimum required to demonstrate a contract of employment.  Whilst we have found some evidence of control, that which does exist falls short of that which is required in the terms of the test propounded by MacKenna J.  The picture in relation to mutuality is even clearer.  It is our conclusion that there is no mutuality of obligation and the degree of control which would have been needed to establish a contract of employment just did not exist.  The appeal therefore should succeed on this basis, but for the sake of completeness we go on to examine the remaining aspects of Mr. Hughes’ working activities, thus enabling us at the conclusion to stand back and take an overview of the entire relationship.
Personal service / substitution
49.	It was Mr. Shorte’s submission that if there was no requirement for personal service there could not be a contract of service.  He further submitted that in this case there was such a requirement.  Ms Smith on the other hand submitted the evidence of the relationship between JCB and Mr. Hughes did not so demonstrate.  In her view, JCB would have been satisfied with any qualified and skilled resource which DDC could provide to them.
50.	As we have already indicated in paragraphs 15 to 17, the evidence on this point is not totally clear.  Had the issue arisen in practice, it would have been a relatively straightforward matter of establishing what had taken place, but we do not have that advantage.  The best and most objective evidence we have are the contracts and Mr. Walton’s statements and these come together in paragraph 23 of Mr. Walton’s statement, which we have summarised in paragraph 16 of this decision.
51.	On balance it would seem to us that Mr. Hughes’ personal services were not required.  JCB wanted a job doing and they wanted it done by a skilled and properly qualified and competent designer.  If it was not Mr. Hughes, no doubt DDC could have provided another.  However, so ambiguous is the evidence and so untested the proposition that we do not feel this is a factor to which we can attribute much if any weight.
Financial risk
52.	Mr. Shorte is correct in his assertion that Mr. Hughes has had no capital at risk, but he is not correct when he said that there was no possibility of Mr. Hughes making a loss on the contract.  On the contrary, as was demonstrated in the contract with Compact Products, Mr. Hughes did carry a financial risk – the risk of termination without compensation.  Equally, Mr. Hughes, as we have seen, was sent home unpaid when the computers crashed.  In both these instances, Mr. Hughes lost income and it was a risk which he bore and accepted as a contractor but would not have been borne by an employee.  The risk, we accept, was not great in financial terms, but it did go beyond the risk of mere late payment of invoices which Mr. Shorte submitted was the only risk which Mr. Hughes carried.
53.	There was also the contractual obligation on Mr. Hughes to put right at his own expense any defective workmanship.  This was not a risk borne by employees.
54.	Mr. Shorte submitted that the opposite side of financial risk was the opportunity to profit – the reason why a businessman will risk his capital.  It was Mr. Shorte’s contention that Mr. Hughes had no scope for increasing his profits and, as with employees, he was effectively on a fixed rate of pay.  There is some strength in this argument.  Certainly as Ms. Smith argued, it was open for Mr. Hughes to negotiate with DDC a higher hourly rate, but similarly presumably a senior employee of JCB could try and negotiate a better rate of remuneration for himself.
55.	Looking overall at financial risk, there is evidence that Mr. Hughes carried some financial risk, albeit not great and this would if anything point towards a contract of services rather than employment.
The provision of equipment
56.	Again this is a factor which could be consistent with either a contract of services or employment.  JCB provided Mr. Hughes with his computer and software, but he provided his own calculator, steel rule and micrometer.  Additionally Mr. Hughes had no access to the stationery cupboard, which was the preserve of the employees.  We see this factor as effectively neutral, not giving any strong indicator either way.
Part and parcel
57.	This is another of those aspects of the relationship where there is evidence which could support the existence of either a contract of service or a contract of services.  As Mr. Shorte pointed out, Mr. Hughes was clearly integrated to a degree into the organisation.  He was provided with a desk, not having to hot-desk, and worked alongside employees with whom, he accepted, he was working as part of a team.  On the other hand he received none of the employee benefits to which we have referred in paragraph 27.  True, he had an email address which on the face of it indicated that he was a part of JCB, but he signed off his emails describing himself as a “contractor”.
58.	There is clearly evidence that could be consistent with either a contract of employment or a contract of services.  We treat this factor as neutral, not giving any strong indicator in either direction.
Intention of the parties
59.	It was accepted by both advocates that the intention of both parties would have been to avoid employment and create self-employment.  Equally it was accepted that there would not be an issue of actual intention because the contract is a fiction.  The position is that in a borderline case intention can be critical, but we do not believe this to be such a case.
Summary
60.	We have already summarised in paragraph 48 our views on the two principal issues of mutual obligation and control.  In considering the remaining features we have also set out our views on each and what to us they revealed of the relationship between Mr. Hughes and JCB.  In taking our overview, we make two preliminary points.  First it is clear that Mr. Hughes was a member of a team and the team consisted of both employees and contractors.  We do not believe this to be of any significance because not every member of a team has to have the same employment status.  A team will be made up of a number of individuals who may bring identical skills or may bring different skills.  They may all perform a similar role or their roles may be varied, and it does not follow that merely because they are part of a team their employment status has to be identical.  It is not therefore indicative that Mr. Hughes had to be an employee merely because he was working in a team with employees.  Secondly, Mr. Hughes, by his own admission, was brought in as a resource, in effect to make up numbers.  He did not bring in a specific skill that the senior designers did not themselves have.  They all possessed similar skills to Mr. Hughes but there were not enough of them, and therefore Mr. Hughes was brought in.  We do not see that this is a relevant distinction to make.  It does not matter whether Mr. Hughes is bringing in a skill which no employee already possesses or whether he is being brought in because JCB just did not have enough employees possessing the skill.  What matter is the terms upon which he was taken on, and that is where we come back to the analysis of the working relationship.
61.	In taking an overview of the relationship, feature by feature, a number of aspects are in effect neutral in that they don’t give a particular indicator either way but could be consistent with either a contract of service or a contract of services.  We would include within this category, for example, the monitoring of what Mr. Hughes was to be doing, where he was to be doing it, the provision of equipment and the fact that he worked as an integral part of a mixed team of employees and contractors.  There were other aspects which gave a small but reasonably insignificant steer towards it being a contract of services, and we would include within this category the degree of financial risk.  We did not find one single aspect which was consistent only with a contract of employment.  On the contrary however we did find certain aspects which in our view were compelling indicators that our hypothetical contract would have been one of services.  We would include here the fact that both JCB and Mr. Hughes treated the contracts as being capable of being terminated mid-way through with little notice and no payment in lieu; the flexibility which Mr. Hughes was allowed in his working hours and perhaps most importantly of all the fact that JCB, when the computers were down, merely sent Mr. Hughes home unpaid.  This latter feature is one which we believe is only consistent with a contract of services, as witness the fact that none of the employees were similarly sent home.
62.	For the reasons given above, the appeal is allowed in full.
This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

LADY MITTING
JUDGE
Release Date: 24 June 2011