ESM7270 – Case law: Usetech Ltd v Young

Point at issue

Whether the Social Security Contributions (Intermediaries) Regulations 2000 and Schedule 12 FA 2000 applied to the provision of services by an IT consultant working through his own service company.

Facts

The salient facts of the case were as follows:

• The company Usetech Ltd (“Usetech”) traded from 1996 to 2003. The officers and shareholders of the company were Mr Hood and his wife.
• The company’s trade was the hiring out of Mr Hood’s skills to various companies engaged in the oil industry. His skills included the production of design drawings of oil wells, rigs etc and he was a specialist in the use of a software product known as Pro-Engineer.
• Usetech had a contract with an agency NES for the provision of Mr Hood’s services to ABB Vetco Gray (“ABB”) beginning in June 2000 (the lower level contract). It was initially expected to last for a short period but in fact Mr Hood remained for 17 months. The contract comprised two documents: a one-page letter of offer and a longer set of ‘Terms and Conditions’.
• ABB is in the business of providing equipment for the oil and gas industry and has a core staff of 750 to 850 permanent employees supplemented with contract staff engaged through agencies. Contract staff were interviewed by ABB before being accepted.
• ABB had a contract with NES (the upper level contract) comprising a letter agreement and two pages of detailed Terms and Conditions.
• The Revenue called two employees of ABB, Mr White and Mr Hunter, as witnesses. Mr White gave evidence that both permanent and temporary staff were normally expected to begin work at 8am and finish at 5pm, but those hours could be extended. Mr Hood was expected to seek his manager’s agreement if wanted time off or to take a holiday although Mr Hood could not be prevented from doing so.
• The Special Commissioner found that temporary members of staff were treated on a day-to-day basis in a manner barely distinguishable from an employee.
• Work was allocated at weekly meetings and Mr Hood did what was required of him as the demands of ABB’s business dictated. Because of his skill level Mr Hood needed no instruction as to how to perform his services.
• The contract between Usetech and NES provided that Usetech was entitled to substitute alternatives with the prior written consent of ABB. Mr Hunter’s evidence was that it was ABB’s intention to secure Mr Hood’s services. If Mr Hood had become ill, ABB would have heeded his recommendation of a replacement but the replacement would have been interviewed and would have been taken on under a new contract. He would not have been taken on as a mere variation, still less a continuation, of the arrangements by which Mr Hood had been engaged.
• Mr Hood had undertaken work for two other companies in the evenings and at weekends but the fee had only been about £800 in each case.

The Inspector had made a decision under section 8 of the Social Security Contributions (Transfer of Functions, etc) Act 1999 in respect of regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000. The decision covered the period 1 June 2000 to 30 March 2001.

The Inspector had also made a determination under Regulation 49 of the Income Tax (Employments) Regulations 1993 in respect of FA2000/SCH12 for the year ended 5 April 2001 in respect of a deemed Schedule E payment.

Appeals were made and they were dismissed by the Special Commissioner.

An appeal was made to the High Court and was limited to two grounds:

• the substitution argument, and
• the want of mutuality argument.

Judgment

The Substitution Argument

The Usetech/NES Terms and Conditions were part of a standard contract, which NES used when engaging individuals through one-man companies like Usetech. It contained a provision relating to substitution but this was not reflected in the ABB/NES contract

The Special Commissioner had said in his decision that ‘the “right” of substitution was largely illusory’. Park J. thought there was a prior question that ought to have been asked and that was whether there would have been any right of substitution at all in the notional contract between ABB and Mr Hood. He concluded that, in accordance with the facts found by the Special Commissioner, the hypothetical contract would not have contained a substitution provision. There was no substitution provision in the ABB/NES contract and there was no evidence to suggest that Usetech had even tried to have such a provision inserted in that contract. Additionally, the facts indicated that in reality ABB required Mr Hood’s services.

The judge went a stage further and said that even if Mr Hood had raised in negotiation with ABB the possibility of a substitution provision, he considered that ABB would not have agreed to it. Had Mr Hood been unable to provide his services and suggested a replacement, the evidence of Mr Hunter was that ABB would have given some weight to that suggestion. But he added:

“That, however, is a far cry from the direct contract between Mr Hood and ABB containing an express provision which conferred on him an entitlement to substitute someone else for himself, subject only to the substitute having the required skills.”

Counsel for the appellant had also argued that as Mr Hood only had access to the Usetech/NES contract, which contained a substitution clause, and was not aware that there was no corresponding clause in the ABB/NES contract, the hypothetical contract must have contained such a clause. He also said that this argument was reinforced by the self-assessment nature of the tax system. The judge rejected those arguments relying in part on the judgment of Burton J. in R (on the application of the PCG and others) v IRC [2001] STC 629 at p.651.

For all those reasons, the judge did not accept that the hypothetical contract would have contained a substitution clause.

He then went on to consider previous court decisions on substitution clauses at clauses 48 to 54 of his judgment and this provides a useful summary of this subject. Importantly he says at clause 53:

“The presence of a substitution clause is an indicium which points to self- employment, and if the clause is as far-reaching as the one in Tanton it may be determinative by itself.”

The Want of Mutuality Argument

The minimum that ABB had to provide and pay for under its contract with NES was 37.5 hours. Additionally, it “was underpinned by a provision that seven days notice had to be given by either party to terminate the contract.” The judge concluded that the hypothetical contract between ABB and Mr Hood would have contained such provisions and on that basis the mutuality requirement would be satisfied.

The appeal was therefore dismissed.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)