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Case Law Update - Dragonfly Consulting Ltd
Dragonfly Consulting Limited v HMRC [2008] EWHC 2113 (Ch)
The Facts
B was the director and owner of 50 per cent of the shares in Dragonfly Consulting Limited (DCL). B was a highly skilled IT systems tester, and during the relevant period he worked almost exclusively for the AA on three IT projects.
DCL did not provide B’s services directly to the AA, but did so through an agency, DPP International Limited (DPP). The AA entered into an agreement with DPP to supply consultancy services and temporary staff and DPP in turn entered into an agreement with DCL who provided the services of B.
B worked mainly at the AA’s premises, although during the second project B could access the AA’s computer from home, and during the same period paid £400 for a training course for the benefit of the AA project. The cost of the training was not reimbursed by the AA.
When working at the AA’s premises B was provided with a desk and computer and worked alongside other employees and contractors. He wore a pass that differentiated him as a contractor rather than an employee. Towards the end of the relevant period B provided, at his own expense, a special chair to help with his back problems.
B was invited to the project Christmas Party and was able to use the onsite canteen (the Special Commissioners decision failed to mention that B paid for the Christmas party and did not receive the benefit of subsidised canteen prices like other employees).
At home and at his own expense B had an ISDN telephone line installed to access the AA’s mainframe computer. B also had a designated office with a desk, two laptop computers (although not bought specifically for the AA project), fax, scanner and office furniture.
Special Commissioners Decision
In January 2008, Special Commissioner, Charles Hellier agreed with HMRC that, for IR35 purposes, B should be treated as an employee. When considering what terms the hypothetical contracts between the AA and B would have contained the Special Commissioner found as follows:
- There would be a series of contracts each with a fixed term. There would be no requirement for the AA to offer a renewal and no obligation for B to accept any offer of an extension.
- Each contract would be terminable before the end of its fixed term by 28 days notice in writing by either party.
- Each contract would be terminable by written notice if B’s performance was unsatisfactory.
- Each contract would be for the services of B. The contract would provide that B could send a substitute but only if the AA had given notice that that particular substitute was acceptable in place of B for such a period as it should specify.
- In relation to control, up until 2 January 2002 B should undertake the tasks allocated to him with a specified but reviewable timeframe and should accept AA’s reasonable directions in relation to what he was doing (rather than how he did it). Thereafter, the arrangements were that B should do work allocated to him within the framework of the project timetable and be subject to the guidance of the team and its managers.
- Payment would be made for the number of days on which B worked at the relevant daily rate.
- In relation to the first and third project, B would have been required to work most of his time at the AA's premises. For the second project, he would have been required at the AA's premises to the extent necessary to do the testing properly.
- There would have been no provisions for pension, holiday pay or sick pay.
- There would have been no provisions for appraisal
The Special Commissioner considered whether under the notional contracts, B would have been an employee. He approached this question by reference to the guidance in the Ready Mixed Concrete case. The commissioner found as follows:
Personal Service
The contracts would have been for the personal service of B in return for remuneration. The AA would have only accepted (and paid for) a substitute if the substitute’s presence and person had been expressly agreed by it, and the AA would not have acted as if it was bound to accept any substitute for B even one who, when offered, was found to be acceptable. This very limited right of substitution is not inconsistent with employment and does not point strongly away from it.
Control
The right of the AA to direct through the operation of the team and guidance of the team manager was enough, in the case of a skilled professional man, to be able to say that there was sufficient control.
Mutuality of obligations
The Special Commissioner implied that the mutuality condition was satisfied by an obligation to work in return for an obligation to remunerate. Further he added that a requirement to make work available (or to pay when it was not) was a significant pointer (a touchstone) towards employment.
Nonetheless the Special Commissioner did highlight that the notional contract would have obliged AA to pay B only for work done. This was seen to be a pointer away from, or put a doubt over, whether it was a contract of employment. However in these circumstance it was not in the Special Commissioner’s view a serious doubt because it was compensated by the fact that work was always available to the “tail end charlies” and that it was known that it would be available during the period of the contract.
The High Court does not confirm this view.
High Court Appeal
The grounds of appeal
DCL contended that the Special Commissioner erred in law in four respects:
- He wrongly concluded that the right of substitution within the notional contract would not have been inconsistent with employment.
- He wrongly concluded that the notional contracts would have contained provisions conferring upon the AA a sufficient right of control to justify the conclusion that the contracts would have been contracts of service.
- He wrongly concluded that the intentions of the parties were irrelevant.
- He wrongly directed himself that the relevant dividing line lay between being in business on one's own account on the one side, and employment on the other side. He failed to allow for the fact that a person may be self-employed without necessarily being in business on his own account. The law recognises the concept of "worker" status. The Special Commissioner evaluated the circumstances without taking into account the fact that an individual might be a worker rather than an employee.
The Decision
Personal Service
Mr Justice Henderson found it clear that DCL did not have an unqualified right as against DPP to provide a substitute to perform the services for the AA, but could only do so with DPP’s prior written consent. Mr Justice Henderson had no doubt that a limited right of substitution in these terms would have been compatible with the existence of a relationship of employment between the AA and B. His Honour went on to say that in order to displace such an inference, it would be necessary to find an express provision in the contract between DPP and the AA permitting substitution at the unfettered discretion of DPP.
Nothing groundbreaking has been established from Henderson J’s dictum on personal service. His Honour has merely reiterated that substitution must be unfettered and that the terms of an ‘upper’ agency to end client contract must reflect the ‘lower’ agency to Limited Company Contract. In this case the ‘upper contract’ contained no provisions on substitution; further the substitution clause in the ‘lower contract’ was fettered in the respect that B would first require prior written consent from DPP.
His honour pointed out that the situation was quite different from the extreme and unqualified right of substitution which the Court of Appeal considered in Express & Echo Publications Limited v Tanton [1999]. Despite this, Henderson J did not go as far to say that the only acceptable form of substitution would be a blanket clause as was found in the Express & Echo case.
Control
Mr Justice Henderson concluded that on the strength of the oral evidence, the Special Commissioner was fully entitled to conclude that B’s performance of his duties was subject to a degree of supervision and quality control which went beyond merely directing him when and where to work. In the case of a skilled worker, you do not expect to find control over how the work is done. Conversely, in the case of self-employed worker in business on his own account you would not normally expect to find regular appraisal and monitoring of the kind attested to by the witnesses who gave oral evidence.
In light of the above Henderson J stated “The weight and significance to be attached to this evidence was a matter for the Special Commissioner, and in my view it was open to him to conclude that the nature and degree of the control by the AA under the hypothetical contract was on balance a pointer towards employment.”
It is clear from this statement that his honour was unwilling to interfere with the Special Commissioner’s findings of fact. His honour provided no guidance on the correct approach to take when considering control and simply said it was open for the Special Commissioner to attach the relevant weight to the evidence at hand.
The intention of the parties
Henderson J pointed out that in borderline cases intention of the parties should be taken into consideration.
The Special Commissioner in the lower court stated “the intention of the parties as regards to whether or not there was to be an employment seems irrelevant”. Henderson J read this as a conclusion that the question of intention is irrelevant in the circumstances of the present case, rather than as a proposition of law that statements of intention can never be relevant for the purposes of the hypothetical contract. In this respect there was no error of law in his conclusion.
Conclusion
The appeal failed on all grounds and was therefore dismissed.
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