UT (Tax & Chancery) UT-2024-000044 - [2025] UKUT 00094 (TCC)

49 Engagements to which this Chapter applies

This Chapter applies where--

...

The circumstances referred to in subsection (1)(c) 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.

This Part applies where–

an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”) who is not a public authority,

…

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

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 as employed in employed earner's employment by the client.

Paragraph (1)(b) has effect irrespective of whether or not–

there exists a contract between the client and the worker, or

the worker is the holder of an office with the client.

…

Where this Part applies

the worker is treated, for the purposes of Parts I to V of the Contributions and Benefits Act, and in relation to the amount deriving from relevant payments and relevant benefits that is calculated in accordance with regulation 7 (“the worker's attributable earnings”), as employed in employed earner’s employment by the intermediary, and

the intermediary, whether or not he fulfils the conditions prescribed under section 1(6)(a) of the Contributions and Benefits Act for secondary contributors, is treated for those purposes as the secondary contributor in respect of the worker's attributable earnings, and Parts I to V of that Act have effect accordingly.

Any issue whether the circumstances are such as are mentioned in paragraph (1)(c) is an issue relating to contributions that is prescribed for the purposes of section 8(1)(m) of the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (decision by officer of the Board).

[8] However, in order to put into context some of the later discussion, it is appropriate now to make some observations on the process by which the hypothetical contract is constructed at Stages 1 and 2, before reaching Stage 3, where the hypothetical contract is characterised:

It is clear that, for income tax purposes at least, this is not simply an exercise in pure “transposition” of terms from the actual contract into the hypothetical contract. As the Upper Tribunal (Mann J and UTJ Thomas Scott) said in Christa Ackroyd Media Ltd v Revenue and Customs Comrs [2019] UKUT 326 (TCC), [2019] STC 2222, at [36]:

“Section 49 explicitly requires the tribunal not to restrict the exercise of constructing the hypothetical contract to the terms of the actual contract, but to assess whether “the circumstances” are such that an employment relationship would have existed if the relevant services had been provided by the individual directly and not via a service company, and s 49(4) provides that “the circumstances … include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements” …” (emphasis added).

It follows from this that it is not necessary to defer all analysis of the hypothetical contract, at Stage 2, until all terms of the actual contract have been comprehensively determined at Stage 1. It may often be appropriate –in the iterative way identified by Lord Hodge JSC in Arnold v Britton [2015] UKSC 36, [2016] 1 All ER 1, [2015] AC 1619, at [77] – to construe the actual contractual arrangements (using the usual canons of construction) whilst considering at the same time how these arrangements would work when determining the content of the hypothetical contract. That approach is suited to the task of synthesising a single hypothetical contract from relevant “circumstances” that include the terms of two distinct contracts. That said, care must still be taken to ensure that ordinary principles of contractual interpretation are correctly applied at Stage 1 since, if the terms of actual contracts are wrongly construed, any error has the potential to infect the ascertainment of the terms of the hypothetical

contract at Stage 2.

Section 49(4) expressly directs attention to the terms of the actual agreements between the relevant parties. Plainly, the terms of such contracts will, generally speaking, be highly material; and what the contracts actually mean will have to be construed according to the ordinary principles of contractual interpretation. But the application of ordinary canons of contractual interpretation will not, of itself, determine

the contents of the hypothetical contract. The fact that the hypothetical contract may be built out of more than one contract (eg, one contract between A and B and another contract between B and C) means that great care must be taken in the following (purely illustrative) regards:

The relevant factual matrix may very well be different for the hypothetical contract than for either the contract between A and B and B and C).

An entire agreement clause in the contract between A and B will be unlikely to operate in the case of the hypothetical contract.

When ascertaining the terms of an actual contract between A and B, matters such as A’s subjective views of the meaning of that contract, or ignorance of the contract’s terms, will typically be irrelevant to questions of interpretation. Equally, 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, we do not consider that these matters can be regarded as necessarily irrelevant when it comes to

determining the terms of the hypothetical contract in the context of the “intermediaries legislation” and are, in our judgment, matters that can appropriately be taken into account. This should not be taken as a suggestion that the terms of the actual contract can be disregarded by the simple expedient of focusing solely on parties’ beliefs, or the way they actually performed the contract. If, applying ordinary principles of contractual interpretation, the actual contracts are found to have a particular term, that will often be a strong indication that the term should be found in the hypothetical contract as well. We simply highlight the injunction in s 49(1)(c) to consider “the circumstances”, which we consider extends to circumstances beyond those relevant to the construction of an actual contract concluded between A and B.

…

[54] In short, whilst the terms of [t]what[sic] the relevant parties in fact agreed remains highly material to the content of the hypothetical contract, we do not consider that it is appropriate for a Tribunal to consider itself bound by the ordinary contractual rules (as interpreted by Autoclenz or otherwise), as opposed to these rules being a highly material factor. To put the same point another way, the parties’ subsequent conduct might amount to a relevant “circumstance” (for the purposes of s 49(1)(c) of ITEPA 2003 and reg 6 of the Regulations) such that different terms should be imported into the hypothetical contract.

[55] However, it would not, in our judgment, be correct simply to construct the hypothetical contract by reference to Ms Adams’s and Mr Paterson’s imperfect, and sometimes incorrect, understanding of the terms of the Written Agreement. That would be to place too much weight on matters not necessarily relevant to the construction of the hypothetical contract which –after all – will have governed the hypothetical legal relationship between Ms Adams and the BBC from its inception.

[56] The construction of the hypothetical contract involves the court in a “counter-factual” exercise: if Ms Adams and the BBC had concluded the contract directly between themselves, what would its terms have been? In this case, the Written Agreement represents a safe starting point, since it was what the BBC agreed with the Company and what the Company (controlled by Ms Adams) agreed with the BBC. However, the following additional points must be borne in mind:

…

In short, in considering the terms of the hypothetical contract regard must be had to what can be drawn from certain hypothetical “flashpoint” scenarios, like the one described. There is nothing particularly artificial in this. The fact is that in the real world, when a genuine and not a hypothetical contract is being construed, there will likely be a “flashpoint” where the parties’ intentions will be manifested for the court (as appropriate) to take into account.

whether there would have been sufficient mutuality of obligation in the hypothetical contracts between Mr Thompson and Sky (“RMC1”);

whether there would have been a sufficient framework of control in the hypothetical contracts (“RMC2”); and

other relevant factors, both contractual and non-contractual (“RMC3”).

A “sufficient framework of control” is essential to the existence of a contract of employment: at [61], [66].

The bar to the existence of a finding of a sufficient framework of control “need not be set at an unduly high level”, once it is appreciated that control is not a determinative factor: at [33].

There is a need for flexibility in applying the test of control, having regard to the particular working environment: [35], [39]-[40]. Depending on the environment, control may be exercised in many different forms; it is not confined to the right to give direct instructions: at [76].

As a result of developments in the patterns of work, there are now a greater number of cases in which a sufficient degree of control is found notwithstanding the absence of some or all of the factors identified by MacKenna J in RMC:power to decide what is to be done, the way in which it shall be done, the means to be employed in doing it, and the time and the place where it shall be done: at [64].

There are individuals who possess skills and are required to exercise judgement in the exercise of those skills who are not susceptible to intimate direction by an employer. In such occupations, the employer may not have the practical ability nor legal right to intervene during the performance of at least some of the duties so as to direct the manner in which they were performed. It would be an error to hold that for this reason the individual is not an employee:at [70]. It is therefore wrong to consider that control always requires a contractual right to intervene in every aspect of the performance by the employee of his or her duties: at [71]-[72].

A contractual power of control which is only exercisable after the performance of the service is a relevant element of control:at [88]