Upper Tribunal Tax and Chancery Chamber

UT/2023/000068 - [2024] UKUT 00262 (TCC)

Fecha: 25-Abr-2024

Discussion

Discussion

40.

The Upper Tribunal decision in HMRC v Atholl House Productions Ltd [2021] UKUT 37 (TCC) (“Atholl House UT”) provided guidance, which we gratefully adopt, regarding the approach which should be taken to the construction of the hypothetical contract. That guidance was very helpfully summarised by the FTT in Atholl House Productions Ltd v HMRC [2024] UKFTT 00037 (TCC) (“Atholl House Remitted”) at [21], as follows:

…At paragraphs [8], [9], [43] and [54] to [56] in Atholl House UT, the Upper Tribunal held as follows:

(1)

in determining the terms of the hypothetical contract, Sections 49(1)(c) and 49(4) of the ITEPA 2003 refer to the “circumstances” in which the services are provided and stipulate that those “circumstances” “include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided”;

(2)

it follows that the terms of the actual contracts forming part of the arrangements will generally be highly material in determining the terms of the hypothetical contract but will not be determinative of them;

(3)

whereas the terms of the actual contracts should be determined by reference to the ordinary canons of contractual interpretation, those ordinary canons will not, of themselves, determine the contents of the hypothetical contract;

…

(5)

when determining the terms of an actual contract, the parties’ subjective beliefs as to the meaning of the contract or ignorance of the contract’s terms will typically be irrelevant. Similarly, unless giving rise to a variation or some form of waiver or estoppel, the manner in which the actual contract is performed is typically irrelevant to its construction. However, those matters should not be regarded as being necessarily irrelevant in determining the terms of the hypothetical contract and are, in the view of the Upper Tribunal, matters that can appropriately be taken into account. This is because they are part of the “circumstances” which are required to be taken into account in determining the terms of the hypothetical contract. The Upper Tribunal observed that:

“The process of synthesising the hypothetical contract out of the actual contracts in fact agreed involves additional considerations, and not merely the usual processes of interpretation.”

As such, the parties’ subjective beliefs and conduct are relevant circumstances which need to be considered in determining the terms of the hypothetical contract at Stage 2, even if they do not affect the identification of the terms of the actual contracts at Stage 1;

(6)

it is not correct to construct the hypothetical contract simply by reference to the understanding by one of the parties of the terms of the actual contracts. That would be to place too much weight on matters not necessarily relevant to the construction of the hypothetical contract. Instead, the appropriate way to approach the task of constructing the terms of the hypothetical contract is to conduct a “counterfactual” exercise - in other words, to consider what the terms of the contract would have been if the client had contracted directly with the worker. In doing so, where the intermediary is under the control of the worker, the terms of the actual contract between the intermediary and the client is a safe starting point because that is what the client agreed with the intermediary and what the intermediary (which is controlled by the worker) agreed with the client;

(7)

in many cases, the worker and the client will have enjoyed a harmonious working relationship in which the precise terms of the actual contracts do not feature prominently as there will be no need for either party to insist on enforcing the strict terms of the actual contracts between the parties. It is therefore helpful in constructing the terms of the hypothetical contract to consider what might have happened in the event of certain hypothetical potential “flashpoints” - which is to say, postulating circumstances where one of the parties might have wished to stand on its rights as set out in the actual contracts against the wishes of the other party and then to consider what might then have occurred…

41.

We deal first with the FTT’s reference in making the disputed finding to clause 1.1 of the Key Terms. This refers to “any variations agreed by the Parties in writing and to any Associated Company as may be agreed between the parties from time to time”. Unfortunately, this drafting is both confused and ambiguous. It can be read either as encompassing only variations agreed in writing between the parties (including any associated company of Sky), or as encompassing both variations in writing and non-written variations agreed from time to time. It appears from FTT[111(7)] that the FTT probably interpreted it as having the latter meaning, and that is made clear by the FTT’s reference at FTT[125(2)] to “clause 1.1 under the Key Terms which provided for the provision of services ‘subject to any variations agreed by the Parties in writing’ and ‘from time to time’”. HMRC’s position is that the clause has the former meaning, so that only variations agreed in writing are effective, leaving the words “as may be agreed between the parties from time to time” to refer only to the inclusion as a party of an Associated Company.

42.

We consider that it is unclear which meaning should be attributed to clause 1.1, but that in the circumstances that issue is of limited relevance. That is because it is relevant to the construction of the Contracts themselves, whereas the disputed finding related to the terms of the hypothetical contract. The real question for the FTT was whether all the circumstances, including the conduct of the parties, justified a decision that in the hypothetical contract a particular written term in the Contracts would have been omitted, varied, modified or supplemented. Put another way, the inclusion in an actual contract of a provision providing unequivocally that no variations would be permitted unless in writing would, of course, be relevant to the construction of that contract, but it could not operate to prevent a conclusion that the terms of that contract would be modified in some way when construing the hypothetical contract, even though the modification had not been agreed in writing. That is clear from the guidance set out above from Atholl HouseUT.

43.

In our view, the material question in relation to Ground 1 is the Edwards v Bairstow question of whether the FTT’s decision at FTT[111(6)] was one which was reasonably available to it on the evidence, or rather was (as HMRC say) irrational.

44.

We agree with Mr Collins that there was sufficient evidence available to the FTT for it rationally to reach the decision which it did, including that to which he referred and which we set out above. The FTT’s findings of fact, including its acceptance of Mr Barnes’ evidence as to matters of fact, formed a rational basis on which to conclude that in the hypothetical contract the right of first call would be modified as set out at FTT[111(6)]. A judgment as to whether the parties’ mutual understanding and working practices went so far as to justify that modification in the hypothetical contract was one for the FTT to make on the basis of all the available evidence. We agree with the FTT’s statement, at FTT[104], that “the construction of a hypothetical contract remains an indispensable task for the tribunal as part and parcel of its fact-finding remit”.

45.

HMRC suggested that the decision which it reached was not open to the FTT on the evidence because the FTT considered no instances of “flashpoints” or clashes between Sky and Mr Barnes which would have served to evidence the likelihood of a modification in the hypothetical contract. We do not agree. The reference in Atholl House UT to the helpfulness of “flashpoints” in this context (summarised at [40(7)] above) does not mean that a finding cannot reasonably be made in the absence of flashpoints. They are helpful but no more than that. In any event, as we pointed out in the hearing, FTT[81] and [82] refer to evidence of what might fairly be described as flashpoints, which formed part of the evidence available to the FTT on this issue.

46.

In conclusion, we dismiss HMRC’s appeal under Ground 1. The determination of Ground 2 will, therefore, be made on the basis that the FTT’s finding at FTT[111(6)] stands.