National Insurance – Income tax – Earnings of workers supplied by service companies etc – Provision of services through intermediary – Worker establishing personal service company – Company contracting with agency for provision of services of client of agency – Whether company liable for national insurance contributions on payments made by client to agency and then by agency to company – Whether, if arrangements had taken the form of a contract between worker and client, worker  would have been regarded as employed in employed earner’s employment by the client – Yes – Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727, reg 6(1) – Appeal dismissed

THE SPECIAL COMMISSIONERS

	FUTURE ON LINE LTD	Appellant

	- and –

             S K FAULDS
	(HM INSPECTOR OF TAXES)    	Respondent

				Special Commissioner:   STEPHEN OLIVER QC

Sitting in London on 23 March 2004

David Allen, JSA Services Ltd, for the Appellant

A J Mear, Inspector of Taxes, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

1.	Future Online Ltd (“FOL”) has appealed against a decision that arrangements under which Mr Shane Roberts (Mr Roberts) provided his services to Electronic Data Systems Ltd (“EDS”) are subject to the legislation relating to the provision of services through an intermediary, usually referred to as the “IR 35 legislation”.  

2.	The decision was  made for National Insurance Contributions purposes under Regulation 6(4), SI 2000 No 727 and Section 8(1)(m) Social Security Contributions (Transfer of Functions etc) Act 1999 and covers the period from 6 April 2000 to 5 April 2002. Additionally FOL has appealed against determinations made under Regulation 49 of the Income Tax (Employments) Regulations 1993, SI 1993 No. 744 for the years ended 5 April 2001 and 5 April 2002.

3.	It is enough to summarize the legislation contained in SI 2000 No.727.  Regulation 6 sets out the circumstances in which the IR 35 legislation will apply.  These are where –

•	“An individual (the worker) personally performs, or is under an obligation personally to perform, services for another person’s business” [Regulation 6(1)(a)];

•	“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” [Regulation 6(1)(b)];

•	“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.”  [Regulation 6(1)(c)].

4.	Mr Roberts gave evidence.  Mr Chris Elder gave evidence for the Inspector.  Mr Elder had been employed by EDS from 1995 to 2003 as a project manager with the key role as the “delivery manager” which involved running the project (described below) at an operational level on a day-to-day basis.  

The factual background

5.	Mr Roberts is an IT specialist with an expertise in testing systems comprised in computerized projects.  

6.	Since 1997 Mr Roberts was employed as consultant by FOL, a company owned 50/50 by Mr Roberts and his wife.  FOL had been providing services under contract within the IT industry. 

7.	From 1 July 2000 until 30 May 2003 Mr Roberts worked with EDS.  Mr Roberts had seen the job advertized on the Internet.  He communicated his requirements through the Internet on the basis that the system would automatically send him an e-mail if a suitable position was advertized.  An e-mail arrived on a Friday from an agency called Elan Computing Ltd (“Elan”).  Mr Roberts spoke to Elan.  An interview was fixed for the next day in Newcastle with an EDS contractor.  From then on Mr Roberts was not aware of Elan playing any part in the process.  In the course of the interview Mr Roberts and the EDS contractor discussed and between them redefine the project.  Mr Roberts was offered the contract.  He accepted and started work the next week carrying out the functions of a test leader.  

8.	Two contracts were created.  One was between FOL and Elan (referred to as “the FOL/Elan contract”); the other was between Elan and EDS (referred to as “the Elan/EDS contract”). The FOL/Elan contract states that FOL will provide the services of Mr Roberts (or such other consultant of FOL that FOL may provide in accordance with clause 1.4) to EDS at “the Site” (i.e. Washington or Longbenton in Durham) for “the Term” (3 months).  Clause 1.4 enables FOL to provide a substitute consultant with the written consent of EDS.  In return Elan agrees to pay FOL £45 per hour for 37.5 hours a week plus travelling expenses plus, where EDS has approved and signed the Work Progress Form, amounts for work done in hours in excess of 37.5 a week – so long as these work hours have been agreed in advance with EDS.  The FOL/Elan contract is terminable by Elan in certain events such as FOL’s failure to provide Mr Roberts’ services to EDS and in any event on four weeks written notice.

9.	In the Elan/EDS agreement Elan agrees to supply the services of various contractors on submission by EDS of a “Purchase Order” in respect of that contractor setting out the relevant details as to payment, job description, location, duration, line of reporting etc.  Elan agrees to procure that the contractor will maintain the required standards of professional behaviour; and any breaches will result in termination of the Purchase Order.  Elan also undertakes to require the contractor to comply with any reasonable terms and conditions specified in relation to any particular Purchase Order.  

10.	The Purchase Order dated 21 July 2000 is for the “Professional services of Shane Roberts to work as a systems engineer”.  It requires that “any hours to be worked to be carried out in accordance with instructions by Heidi Gillard or nominee” and that “time sheets must be attached to all invoices and sent to Accounts Payable Department in order for payment to be made.” 

11.	The Purchase Order dated 12 December 2000 is for the “Professional services of Shane Roberts to act as a systems test team leader based at EDS Longbenton”.  It requires that “any hours worked over the standard 7.5 hours a day must be with the prior agreement and authorization of the EDS project manager” and that “all work to be carried out in accordance with the instructions from Simon Young or nominee.”  The same requirements appear on later purchase orders.  The Purchase Order dated 5 June 2001 differs only in that the services are described as “Build Manager”. 

12.	The professional services to be provided by Mr Roberts to EDS related to EDS’s agreement with the Department of Work and Pensions (DWP) to install the Child Support Reform (CSR) programme.  The previous programme had been found to be unreliable.  This one, originally to be installed over five years, was required to be implemented within three years. Mr Roberts’ work was directed at the testing stage.  

13.	At the start of the engagement Mr Roberts’ position was as system test team leader. Within a few weeks Mr Roberts was “promoted” (to use Mr Roberts’ word) to “build manager” with responsibility for a particular phase of the project.  

14.	Mr Roberts said that he had been the first person employed in this role.  His first task had been to create templates required for the testing system.  These had been designed as a temporary measure but remained in use throughout the project.  It had been left to Mr Roberts to monitor and record testing progress.  Mr Roberts was given no specific guidance as to the carrying out of this work.  The CSR system had to be tested to meet the requirements catalogued by the DWP.  Mr Roberts saw his role as ensuring this objective no matter how unpopular this made him with the development team whose output was being tested.

15.	In the course of the project Mr Roberts assembled a team to carry out the necessary testing and personally interviewed some 160 staff.  Mr Roberts shared his expertise with those members of the team and made himself available to advise and assist them when they met technical problems.  He allocated work between team members and ensured that the team as a whole met its objectives.

16.	The CSR project was under the overall management of the chief executive.  In his capacity as system test team leader Mr Roberts’ project line manager was the test manager.  As build manager Mr Roberts had work allocated to him and his team following discussion with the EDS project line manager.  At all times Mr Roberts was deputy to the test manager.  

17.	Mr Roberts’ name appeared on the organization chart for the CSR project as “systems test operational manager”.  EDS, Mr Roberts told us, did not want to have consultants appearing on the organizational chart; they asked him to take up a permanent position, but he refused.

18.	Mr Roberts in his test management role attended weekly meetings with the DWP to report on progress.  Present at those meetings were the Minister, on occasions, a senior civil servant, the user’s acceptance test manager for the DWP and two EDS managers (responsible for design and development).  Each night at 9.00pm and every morning at 8.00am Mr Roberts reported to the EDS programme manager on the work done by the test team.  

19.	The purchase orders issued by EDS to Elan relating to Mr Roberts’ services were, Mr Roberts said of no concern to him.  He did not see them.  He received no instructions from either Heidi Gillard or Simon Young referred to in those orders.

20.	Mr Roberts regularly put in working hours well over the 37.5 hours per week.  He accrued timesheets and submitted them in batches for authorization.  He never sought prior approval from EDS for working hours in excess of 37.5 hours a week.  Because of the tight time limits for the CSR project there was, Mr Roberts understood, a general authorization from EDS to work excess hours without prior approval.  Mr Chris Elder’s understanding was that working excess hours required approval from the relevant EDS line manager.  I accept that, while there was a strict legal obligation on Mr Roberts to obtain prior approval to working excess hours, it was not EDS’s practice to require this of him.  Had EDS wished to insist on the strict position, they could have done so but on giving reasonable notice to Mr Roberts.

21.	Mr Roberts did some work on the CSR project when at home.  He used his own laptop and had “remote access” to the EDS local network.  Because of firewalls surrounding the CSR project information, Mr Roberts’ remote access was limited.  Mr Roberts understood that only he of all those involved in the CSR project had remote access from home.

22.	At no time did FOL seek approval from either Elan or EDS to provide a substitute for Mr Roberts.  

Conclusions

23.	I have to identify “the arrangements involving an intermediary” (i.e. FOL) under which the services are performed.  I then have to address the question whether, had those arrangements taken the form of a contract between Mr Roberts and EDS, Mr Roberts would be regarded as employed in the relevant sense.  

24.	I turn first to the arrangements.  From the summary of facts set out above, it will be seen that, throughout the periods covered by the disputed decision, EDS obtained the personal professional services of Mr Roberts.  That appears from the purchase orders.  Moreover neither FOL nor Mr Roberts had any right to substitute someone to take his place.  All Mr Roberts or FOL could do was to offer a substitute, but EDS was not obliged to accept.  

25.	Mr Roberts’ contribution to the CSR project was at a high technical level and of great importance to its success. Nonetheless the work was carried out at Longbenton and Washington because that was where EDS required it to be performed; a small amount of work may have been carried out at Mr Roberts’ home through remote access.  Mr Roberts had a large measure of control over how he conducted the testing procedure; but there was a test manager with overall direction and with responsibility for testing procedures.  And work was allocated to Mr Roberts and his team following discussion with the EDS line manager.  In law, though not actually in practice, the purchase order required Mr Roberts to carry out work in accordance with instructions.  The FOL/Elan agreement specified 37.5 hours each week as the standard hours and in law, though again not in practice, Mr Roberts required permission from EDS before working more hours in a week.  Also relevant is the fact that Mr Roberts was required, under the FOL/Elan agreement, to adhere to EDS’s rules and regulations.  

26.	Entitlement to payment for Mr Roberts’ services was comprehensively covered by the FOL/Elan agreement.  There was a fixed entitlement to an hourly rate for 37.5 hours a week: and payment for excess hours under the terms of the agreement, which were never changed despite the fact that Mr Roberts habitually worked excess hours without approval, depended on the prior approval of EDS.

27.	Save for his laptop (which most individuals with qualifications similar to those of Mr Roberts possess) Mr Roberts provided no capital equipment for the work that EDS required him to perform.  Mr Roberts referred to PI indemnity cover being held by FOL.  I had no further details of this.  

28.	Mr Roberts, throughout the period covered by the disputed decision, played a pivotal part in EDS’s taskforce working on the CSR project.  He was, as noted, accountable to a line manager.  He was directly involved in recruiting and managing the members of his team.

29.	If those arrangements had been embodied in a contract between Mr Roberts and EDS, would the circumstances have been such that Mr Roberts would have been regarded as employed by EDS?  No, argued Mr David Allen for Mr Roberts.  There was no control in an employer/employee sense by EDS of Mr Roberts’ activities.  Mr Roberts had been engaged by EDS at the time when it had the challenge of putting in place a system in a much shorter period that would normally have been required.  Mr Roberts was, Mr Allen urged, given a wide remit and not tied down by instructions or rules.  He was the expert and he wrote the templates. While I fully recognize the exceptional experience and essential functions performed by Mr Roberts in the CSR project, I also have to recognize that there were constraints, legal and practical, governing Mr Roberts’ work at the sites.  I have identified certain arrangements in the previous paragraphs which show that, in essence, EDS controlled Mr Roberts in his work.  EDS was able, on a continuing basis, to direct when and where the work was to be done; and, while I accept that Mr Roberts’ work involved an especially high level of skill and independence of judgment, EDS were through their organizational structure able to control how the work was to be done.  Mr Roberts’ position was deputy to the test manager; he continued in this position full-time for nearly three years. Throughout that period the position was integrated into EDS’s overall structure set up to carry out the project.  Looking at the matter with the question of whether Mr Roberts was subject to EDS’s control to a sufficient degree to make EDS Mr Roberts’ “master”, I have to conclude that, had there been a contract between EDS and Mr Roberts, Mr Roberts would have been employed rather than in business on his own account.

30.	Then it was argued by Mr Allen that the actual obligations between EDS and Mr Roberts was so limited as to fall short of the “irreducible minimum of obligation on each side” required to create a contract of service.  Those words come from the decision of Stephenson LJ in Nethermere (St Neots) Ltd v Gardiner & Another [1994] ICR 612 at 623; the judgment refers back to the words of MacKenna J in the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance:

“I do not quote what he says of  (i) and (ii) except as to mutual obligations:

“There must be a wage or other remuneration.  Otherwise there will be no consideration, and without consideration no contract in any kind.  The servant must be obliged to provide his own work and skill.”

There must, in my judgment, be an irreducible minimum of obligation on each side to create a contract of service.  I doubt if it can be reduced any lower than the sentences I have just quoted.”

Here it will be recalled that the services of Mr Roberts were engaged by EDS through FOL as intermediary and Elan as agent for a three month period which, in pursuance of the purchase order mechanism in the Elan/EDS agreement, were extended to cover the 153 weeks to the end of March 2002.  The arrangement could be terminated by EDS by allowing the period covered by the purchase order in question to run its course without being renewed or on giving four weeks’ notice.  Until termination by EDS therefore there was an obligation on EDS to provide paid work at a place of work and a corresponding obligation to EDS for the provision of Mr Roberts’ services coupled with Mr Roberts’ obligation to conform with EDS’s rules and working practices including the requirement to submit timesheets.  It seems to me on that basis that the mutual obligations that actually existed between Mr Roberts and EDS were well above the irreducible minimum.  Had there been a contract directly between EDS and Mr Roberts its mutual obligations would have been such as to establish an employer/employee relationship.

31.	Finally I am satisfied that Mr Roberts, throughout the time he worked for EDS, was part and parcel of the organization.  In the particular circumstances of the present arrangements Mr Roberts was well integrated into EDS’s structure assembled to carry through the CSR project.  He had a manager to whom he was accountable.  Mr Roberts in turn worked as part of a team managing other people.  He was involved in discussions as to work allocation with EDS’s project line manager. He was expected to be available to advise and assist other members of the team.  He attended meetings with interested parties alongside other EDS managers.  Although Mr Roberts’ role in the organization will not necessarily be determinative, it is clear that in the present circumstances he was an integral part of the EDS organization dedicated to the CSR project.  This feature is in line with the conclusions I have reached based on the control over Mr Roberts’ work and the presence of mutual obligations of an employer/employee nature existing between EDS and Mr Roberts.

32.	For all those reasons I think that the Inland Revenue are correct in contending that, if the services provided by Mr Roberts had been provided under a contract directly between him and EDS, the terms of that hypothetical contract would have been such that for income tax purposes he would have been regarded as an employee of EDS and for NIC purposes he would have been regarded as employed in “employed earner’s employment” by EDS.  I therefore decide that the Regulation 49 Determination for the year ended 5 April 2001 should be confirmed in principle.  The Regulation 49 Determination for the year ended 5 April 2002 should also be determined on the basis that Mr Roberts was an employee of EDS; I leave the precise amount of tax due to be determined.  The Section 8 Decision Notice for the period 6 April 2000 to 5 April 2002 should be determined on the basis that Mr Roberts is regarded as employed in employed earner’s employment by EDS; I leave the precise amount of contributions due to be determined.

STEPHEN OLIVER QC
SPECIAL COMMISSIONER

SC 3095/03