UT/2020/000377 - [2024] UKUT 00099 (TCC)

We have set out above the three-stage process that the Court of Appeal endorsed in Atholl House CA (at [7]) as an approach that the tribunal should adopt in addressing appeals under the intermediaries legislation. The Court of Appeal in that case referred to that process as a “helpful structure”. In Kickabout Productions Limited v. HMRC [2022] EWCA Civ 502 (“Kickabout CA”) the Court of Appeal uses similar language.

The Court of Appeal in both Atholl House CA and Kickabout CA describes the three-stage process as a “helpful structure” and not in mandatory terms. However, a tribunal would be well-advised to follow it. It is an approach endorsed by the Court of Appeal that is designed to assist the tribunal correctly to address the questions that are before it under section 49(1)(c)(i) – namely whether the circumstances are such that if the services that are provided by the worker were provided under a contract directly between the client and the worker, the worker would be regarded as an employee for income tax purposes – having regard to the circumstances which the tribunal is required to take into account under section 49(4).

Furthermore, any approach that a tribunal adopts in such cases must answer the statutory question before it, namely whether 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. That requires, as Park J identified in Usetech at [9], “an exercise in constructing a hypothetical contract which does not in fact exist and then enquiring what the consequences would have been if it had existed” (Footnote: ²) (i.e. whether the relationship between the worker and the client would have been one of employment or self-employment). Any acceptable process must therefore involve: (i) the construction of the hypothetical contract and (ii) the determination of whether services provided under that hypothetical contract would be performed under a contract of service or a contract for services. This is not to impose a formalistic requirement on an FTT decision to the effect that the terms of the hypothetical contracts must be set out in earlier pages, rather than later pages. That said, the FTT decision must explain clearly why the hypothetical contract is, or is not, a contract of employment and this is most naturally done by first setting out what the terms of the hypothetical contract are, and then analysing them.

The Upper Tribunal in Atholl House UT also provided guidance on the process by which tribunals should set about constructing the hypothetical contract for the purposes of Stage 1 and Stage 2 of the three-stage process (Atholl House UT [8], and [55] – [56]). There is also some helpful guidance in the judgment of Park J in Usetech (Usetech [43] – [47]) on how the tribunals should approach this task in a case, such as this, where an agency is interposed in the contractual chain. The main points that we take from that guidance are as follows: