Upper Tribunal Tax and Chancery Chamber

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

Fecha: 15-Dic-2023

The FTT Decision

The FTT Decision

14.

The FTT decided that the intermediaries legislation could not apply to the contractual arrangements that we have described above.

15.

The Decision is lengthy and detailed. It runs to some 90 pages and 488 paragraphs. For present purposes, we shall confine ourselves to a summary of the key aspects of the Decision and a summary of the FTT’s conclusions. We will return to some of the more important paragraphs as and when we address the grounds of appeal.

16.

As we have mentioned, the only issue in this appeal concerns the application of the intermediaries legislation. There was, however, another issue before the FTT. It concerned whether the determinations for income tax for the tax years 2010/11 and 2011/12 had been made in time and, in particular, whether any potential loss of income tax was brought about carelessly by Mr Alcock, RALC or their advisers so that the extended six year time limit in section 36 of the Taxes Management Act 1970 could apply (FTT [12(b)]). Having concluded that the intermediaries legislation could not apply to the contractual arrangements, the FTT did not need to decide that question and it did not do so.

17.

The FTT summarized the approach that the Tribunals should adopt in these cases in the following terms (at FTT [41]):

“41.
The legislation requires the Tribunal to do the following:
a.
Make findings of fact about the actual terms on which the parties contracted and any other relevant “circumstances” for the purposes of s.49(1)(c)(i) and (4);
b.
Determine the terms of the hypothetical contracts;
c.
Apply the common law tests to determine whether the hypothetical contracts would have been contracts of employment.”

18.

The FTT then instructed itself in greater detail on the application of each of the steps in that approach. As regards the second step in the process (at FTT [41(b)]), it referred in particular to the guidance given by Park J in Usetech Ltd v Young [2004] EWHC 2248 (Ch) (“Usetech”) regarding the construction of the “hypothetical contract” between the individual and the end client. This included the comments of Park J (at (Usetech [9]) that section 49(1)(c) involves an exercise of constructing “a hypothetical contract which did not in fact exist, and then enquiring what the consequences would have been if it had existed” and (at Usetech [43] – [47]) to the effect that the exercise requires a consideration of all the contracts in the chain, including where an agency is interposed, the terms of any contract between the agency and end client, even if the individual was unaware of those terms (FTT [43]).

19.

In relation to the final step (at FTT [41(c)]) – the application of the common law tests to determine whether the hypothetical contract as found was a contract of employment – the FTT identified the correct test as being “the classic statement” of MacKenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497 at p515 (“Ready Mixed Concrete”). The FTT says this at FTT [44]:

“44.
There is no relevant statutory definition of employee or employment. The Tribunal is required to apply the common law in this respect. The classic statement on the conditions required for a contract of service is that of MacKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 at 515:
“(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 some 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.”

We will refer to the test identified by MacKenna J in Ready Mixed Concrete in this decision as the “RMC test”. The first limb of that test is typically referred to as requiring “mutuality of obligation”. We will also adopt that terminology in this decision.

20.

The FTT then reviewed in some detail some of the principles derived from the case law authorities on the application of the three limbs in the RMC test (FTT [48] – [76]).

21.

The FTT’s findings of fact are set out in the Decision at FTT [89] – [230]. This is a lengthy and detailed section which, to the extent relevant, we will revisit in our analysis of the grounds of appeal. At this stage, we will confine ourselves to a description of the approach taken by the FTT and its key findings.

(1)

The FTT began by setting out its findings on the background to the contractual arrangements with Accenture in relation to the first contract and the third contract (FTT [96] – [122]). It conducted an analysis of the LLCs and the ULCs in those cases by reference to the limbs in the RMC test that is, by identifying the aspects of the contractual arrangements that it considered to be relevant to the issues of mutuality of obligation (FTT [123] – [130]) and to questions of control (FTT [131] – [139]). Significantly, the RMC test is applied to the terms of the LLCs and ULCs and not to the terms of the “hypothetical contracts” to which Park J had referred in Usetech.

(2)

The FTT performed a similar exercise in relation to the contractual arrangements with DWP in relation to the second contract. The background to the second contract is set out at FTT [144] – [147]; the identification of the key terms of the LLC and the ULC is found at FTT [148] – [166]; the issues that are relevant to questions concerning mutuality of obligation at FTT [167] – [175] and those relevant to the questions of control at FTT [176] – [182]. Again, the tests of “mutuality of obligation” and “control” in these sections is applied to the ULC and LLC rather than any hypothetical contract.

(3)

The FTT then set out its findings regarding the operation of the various contracts in practice (FTT [183] – [210]) before concluding with evidence relating to other issues that it considered relevant, such as other work done by Mr Alcock outside the contractual arrangements in the tax years in question.

22.

Having set out the parties’ submissions, the FTT turned to its discussion of the issues. Its main conclusions are set out below.

(1)

The FTT found that there was insufficient mutuality of obligation between Mr Alcock and the end clients in the hypothetical contracts to establish an employment relationship. We will consider the analysis in some detail later in this decision, but, in summary, this conclusion was based on findings that there was no express contractual obligation on Accenture or DWP to provide Mr Alcock with any minimum amount of work and no contractual obligation on Mr Alcock to accept work offered.

(2)

In the first instance, the FTT conducted its analysis by applying the relevant aspects of the first limb in the RMC test to the actual terms of the LLCs and ULCs (rather than the hypothetical contracts) for each contractual arrangement (in relation to the arrangements with Accenture, FTT [315] – [331]; in relation to the arrangements with DWP, FTT [333] – [346]).

(3)

However, in both sections, there is an apparent change of emphasis right at the end. Having been focused on the LLCs and ULC relating to Accenture throughout its analysis at FTT [315] to [331], the FTT expresses an interim conclusion on the hypothetical contract at FTT [332]. Similarly, FTT [348] contains an interim conclusion on mutuality of obligation in relation to the hypothetical contract relating to the DWP engagement even though the analysis from FTT [341] to [346] was concerned with the actual LLC and ULC.

(4)

The FTT then set out its overall conclusion in relation to the hypothetical contracts (at FTT [349] – [358]). The FTT concludes at FTT [355]:

“355.
… the Tribunal is not satisfied on balance that sufficient mutuality of obligations did exist between Mr Alcock and the end clients in the notional contracts to establish an employment relationship. Mr Alcock and the Appellant have discharged their burden of proof on the balance of probabilities in establishing a lack of mutuality of obligations sufficient to form an employment relationship with the end clients. Although there was some mutuality of obligations in respect of the requirement for payment if work was done, it did not extent beyond the irreducible minimum in any contract to provide services nor demonstrate the relationship was one of a contract of service.”

(5)

Although it forms part of the first limb of the RMC test, the FTT dealt separately with the question as to whether there was a contractual obligation to provide personal services on the part of Mr Alcock in the hypothetical contracts under the arrangements with both Accenture and DWP. It found that there was (FTT [380]). Although the contracts included provisions that entitled RALC to substitute another worker in place of Mr Alcock, that right was fettered. In each case, the end client, Accenture or DWP, had the right to refuse to authorize any substitute worker that they deemed to be unsuitable. Once again, the FTT reached this conclusion by applying the RMC test to the actual terms of the LLCs and ULCs for each contractual arrangement (in relation to the arrangements with Accenture, FTT [359] – [362]; in relation to the arrangements with DWP, FTT [363] – [367]), before considering the operation of those terms in practice (FTT [368] – [371]). Even though that analysis focused on the LLC and ULC, the FTT expressed a conclusion on the effect of the hypothetical contract in the following terms at FTT [380]:

“380.
However, for the reasons set out above, the Tribunal is satisfied that the fettered rights of substitution points to there being a contractual right of personal service by Mr Alcock in his hypothetical contracts with both Accenture and DWP. This would have pointed towards them being contracts of service (employment) rather than contracts for services (self-employment) but for the Tribunal’s conclusion on mutuality of obligations.”

(6)

As regards the questions of control, the FTT concluded that the rights within the arrangements exercised by the end clients were on balance more consistent with a contract for services. Although the rights of the end clients in the arrangements to control when and where Mr Alcock worked were consistent with a contract of service, these considerations were outweighed by the contractual arrangements relating to control of what Mr Alcock did and how he worked, which pointed more to the arrangements being a contract for services. The FTT sets out some conclusions at FTT [428] – [429] in passages that seem to be dealing with the ULCs and LLCs rather than the hypothetical contracts:

“428.
The Tribunal is satisfied that the right of control under the terms of the contracts and control exercised in practice by his clients, Accenture and DWP, over what and how Mr Alcock worked points towards a self-employed relationship (contract for services). However, the Tribunal is satisfied that the right of control under the terms of the contracts and control exercised in practice by his clients, Accenture and DWP, over where and when Mr Alcock worked points towards [a self-employed relationship (contract for services)]. The Tribunal has reminded itself that it is the right of control which holds primacy rather than how it was exercised in practice.
429.
Nonetheless, the Tribunal does not conclude that the overall balance is neutral in each of the contracts. Assessing the matter qualitatively, by standing back and looking at the overall picture, the Tribunal is of the view that Mr Alcock's significant right of control over what and how he worked for the end clients outweighed their right over where and when he worked. He was not legally obliged and did not in practice perform all the roles that employees at DWP and Accenture would be required to perform. The end clients' rights of control over 'where and when' Mr Alcock worked were consistent with a contractor delivering project based arrangements rather than demonstrating a master-servant relationship, organisational position or role-based arrangement. The contractual rights of control over where and when Mr Alcock worked were required by the nature and deadlines of the tasks to be completed and the quality of the service to be provided for the end clients than the role or position to be performed or occupied.”

(The square brackets in paragraph [428] are inserted by us. We infer from the context that the reference in those square brackets to “a self-employed relationship (contract for services)” should be to “an employment relationship (contract of service)”.)

In this case, the FTT reached this conclusion by applying each aspect of the control test in the second limb of the RMC test to the actual terms of the LLCs and ULCs for each contractual arrangement, taking into account the manner in which those contracts were operated in practice; reaching an interim conclusion for each aspect on the position between Mr Alcock and the end client (although there is no express reference to any hypothetical contract in this section); and then reaching an overall conclusion (as set out above).

(7)

The FTT then took into account various factors arising from the contractual arrangements and considered their consistency with employment or self-employment. These included:

(a)

Mr Alcock had the right to carry out other work at the same time as carrying out the engagements under each of the arrangements, which he exercised “to a limited extent” (FTT [439]);

(b)

all the contracts included a provision stating that there was no intention to create an employment relationship between the end client and Mr Alcock (or RALC) (FTT [440]);

(c)

the contracts between the parties were negotiated at arm’s length; Mr Alcock negotiated the daily rate and expenses (FTT [441]);

(d)

Mr Alcock was in business on his own account (FTT [442] – [452]):

(i)

Accenture and DWP treated Mr Alcock as a contractor and not as an employee; he was not responsible for employee performance, HR issues, training, or financial performance in the teams within which he worked;

(ii)

Mr Alcock took steps to develop his own business, including marketing his expertise on LinkedIn;

(iii)

Mr Alcock was responsible for his own professional indemnity insurance;

(e)

Mr Alcock was not entitled to holiday pay and sick pay and the termination rights under the contractual arrangements differed markedly from those that applied to employees (FTT [452] – [461]);

(f)

the ability of Mr Alcock to make a profit or loss from the arrangements (FTT [462] – [473]).

On balance, the FTT concluded that these factors were either neutral or pointed towards self-employment.

23.

At this stage, the FTT set out its conclusion on the first issue – the applicability of the intermediaries legislation – and declared itself “satisfied, on balance, that the hypothetical contracts between Mr Alcock and his end clients… would be contracts for services” (FTT [477]). The FTT summarized its reasons as follows (FTT [478] – [484]):

“479.
The contractual rights in the case of DWP engagement (the second contract) indicate a contract for services (self-employment) in the notional contract with Mr Alcock (see for example the termination without notice clause, the remedying own defects, the lack of mutuality of obligations clause etc) to a greater extent than in the Accenture contracts. The operation of the contract with DWP, as explained by Mrs Hartley and Read, also firmly indicates the same. Nonetheless, it is satisfied on balance that the notional contracts between Mr Alcock and Accenture would also be contracts for services based upon the rights and operation of the contracts – the early termination of the first contract is a good example of this.
480.
In each of the contracts, the Tribunal is of the view that although Mr Alcock provided his services for payment, the lack or insufficiency of mutuality of obligation demonstrates the notional contracts to be ones for the provision of services. DWP and Accenture paid Mr Alcock a daily rate for the work carried out in accordance with the agreed rate as invoiced but there was no contractual obligation beyond that. The Tribunal is satisfied that there was no more than an expectation as to the days and hours that would be worked each week and it did not crystallise into an obligation. Mr Alcock would only be paid if he worked with no guaranteed obligation on the part of his end clients to provide him any work during the contracts.
481.
While the personal service limb of the RMC test was satisfied, it is a necessary but not sufficient requirement for an employment relationship. Further, it was only on the basis of the ULCs that the Tribunal found that the rights of substitution were significantly fettered – these ULCs were not available to nor within knowledge of Mr Alcock but must be considered nonetheless.
482.
The Tribunal is also satisfied that, on balance, the degree of control as of right and as exercised by the end clients over Mr Alcock indicates that the notional contracts would be ones for services (self-employment).
483.
Finally, the other contractual terms indicate, on balance, (more so in the case of DWP contract) that the notional contracts would be ones for services.
484.
The Tribunal has stood back, applied the three stages of the Ready Mixed Concrete test, considered all the relevant circumstances including “painting the picture” and taken into account whether Mr Alcock was in “business on own account”, the Tribunal is satisfied the hypothetical contracts with his end clients would be ones for services and therefore not caught by the IR35 legislation.”

24.

Having expressed its conclusion on the first issue and the reasons for it, the FTT set out (at FTT [485]) its construction of the hypothetical contracts between Mr Alcock and his end clients.

“485.
The Tribunal has weighed up all the evidence and come to the conclusion that the hypothetical contracts between Mr Alcock and each of the end clients would provide as follows:
(1)
There would be no mutuality of obligation between Mr Alcock and DWP and Accenture expressly stated in the contract. There would be no obligation for Accenture nor DWP to provide a minimum amount of work (number of days or hours) to Mr Alcock during the course of the contract or thereafter. Mr Alcock had the right not to accept or refuse to accept work from each during the course of the contract. There would be an obligation for both Accenture and DWP to pay Mr Alcock only if work was offered and undertaken.
(2)
The termination provisions of each contract would provide for no notice period needing to be given by DWP and 30-days notice by Accenture to Mr Alcock. Notice could be given by either client without reason. There was no entitlement to any paid notice from either client nor would Mr Alcock have the right to claim payment for work done outside of the cancellation of the contract. Therefore, the contracts could be cancelled at any time by either client for any reason without financial obligation.
(3)
There would be a substitution clause in both the Accenture and DWP contracts but it would be fettered in that each client would have the ability to consider and decide whether to accept substitutes offered by Mr Alcock based on the suitability, qualifications and expertise of the substitute. However, in relation to the Accenture contract, it would be able to refuse to accept a substitute unless Mr Alcock was unable to work. In DWP contract, it would have a further right of absolute and unqualified right to veto any proposed substitute.
(4)
There would be not be any significant control over what work Mr Alcock performed and how he did so within the specific Accenture and DWP’s projects for which he was contracted so long as he enabled the ultimate outcome to be delivered in collaboration with their teams. Mr Alcock was to collaborate with the clients to agree the best way in which to deliver those parts of the project for which he or his team was responsible. In the very unlikely event that a dispute arose between the parties which could not be resolved over what and how Mr Alcock’s work was to be delivered, this would result in either party terminating the contract rather than any direction by the clients for Mr Alcock to perform work of a nature or in a manner he could not agree to.
(5)
Any work for both Accenture and DWP was to be conducted mainly within business hours for an average of 40-45 hours per week but the contract would specify a working week with variable hours and provision to provide variable cover, in case Mr Alcock was indisposed.
(6)
Any work for Accenture and DWP was to be conducted by Mr Alcock at the clients’ office unless working at home or outside those hours was reasonable i.e.. did not interfere with delivery of his objectives. Mr Alcock would have to inform his clients of when he was working from home but they could not unreasonably refuse to let him do so.
(7)
The hypothetical contract would have to have a clause, which enabled Mr Alcock to perform the consultancy services in the course of each assignment for Accenture and DWP at his own premises when reasonable. Mr Alcock would not be required to but could pay for commercially leased business premises, with broadband, web domain, business e-mail domain, conference call facilities, etc.
(8)
Mr Alcock would have to give advance notice to both clients of any holidays or non-working days he was taking but it could not be unreasonably refused.
(9)
Mr Alcock was permitted to work for other clients during the course of contracts with both Accenture and DWP so long as this did not interfere with the delivery of his projects within each of their assignments.
(10)
Mr Alcock was to have no sick pay, paid holiday or pension entitlement from either Accenture or DWP.
(11)
Mr Alcock was not to hold himself as working out for either DWP or Accenture. There was no intention that they be considered his employer. Mr Alcock could not represent, deputise or act on behalf of the clients.
(12)
Mr Alcock was to carry his own professional indemnity insurance.
(13)
Mr Alcock was not to attend DWP or Accenture internal meetings which were not specific to delivery of the projects in which he was engaged.
(14)
Mr Alcock was not to have any responsibility or obligation for training himself or others, HR, pastoral or wider management responsibilities than those necessary to collaborate on projects. He was not subject to nor responsible for disciplinary procedures for either DWP or Accenture.
(15)
Mr Alcock had no financial responsibilities, accountability or obligations for either DWP or Accenture.
(16)
The contracts for DWP and Accenture would be for fixed terms and based upon delivery of specific projects rather than filling specific job roles or positions.
(17)
The contracts with DWP and Accenture would be at an agreed daily rate of pay, which left Mr Alcock to deliver the projects, effectively and efficiently.
(18)
Mr Alcock would be liable in certain circumstances in negligence to the Accenture and DWP for errors committed and in relation to DWP he would have to remedy errors at his own cost.”