Substitution a factor in High Court defeat
More details are emerging of the recent IR35 High Court case which found against former freelancer, Bill Hood and his company Usetech.
The Incorporated Council for Law Reporting, (as reported by Harriet Dutton, barrister) said:
Chancery Division: Judge Park: 8 October 2004
"A computer software specialist who, through his one-man company, provided his services to a client, a company involved in the oil and gas equipment industry, attracted the anti-tax avoidance provisions introduced in the Finance Act 2000 and commonly referred to as the IR35 legislation. Restrictions resulting from contractual provisions agreed between his company, the client and a third company operating as a recruitment agency, did not prevent payments from being treated as earned income from his employment by the client.
"Park J so held in a reserved judgment dismissing an appeal by Usetech Ltd, a company owned by a software specialist, Mr William Hood, from a decision by a special commissioner (Mr Colin Bishopp) that the effect of IR35 for tax and national insurance purposes was to treat payments received by Usetech Ltd for its provision of Mr Hood's services as being his personal income from an employment with the client, ABB Vecto Gray (UK) Ltd.
"The IR35 legislation applied to small service companies that provided the services of an individual to a client who required those services. In June 2000 Mr Hood provided his services to ABB Ltd, not by a direct contract with his one-man company, Usetech Ltd, but through a contract between Usetech Ltd and a technical recruitment agency, NES International Ltd.
"PARK J said that Usetech Ltd argued that the special commissioner erred in law and that the IR35 legislation could not apply because of (i) the existence of a contractual provision between Usetech and NES entitling Usetech to provide the services of a substitute in place of Mr Hood (the right of substitution argument); (ii) there being no obligation on ABB Ltd to provide work for Mr Hood (the want of mutuality argument). The issues had doubtless been complicated by the interposition of NES, the structure of the legislation contemplating the existence of two contracts only.
"The legislative scheme however required the three contracts to be subsumed into one notional contract. That was simply one for the services of Mr Hood, not for those of Mr Hood or a suitably skilled substitute. The common sense of the matter was that a hypothetical contract between Mr Hood and his end client would not have contained a substitution provision. That provision in the Usetech/NES contract was a standard form provision that Usetech could not have required to be included and of which it doubtless took no notice.
"The conclusion was that had there been a real direct contract between Mr Hood personally and ABB for him to provide his skilled services, the contract would not have included a substitution provision. Even if Usetech's argument was correct, it would not have been sufficient to override the effect of all the other considerations which led the commissioner to decide that the relationship would have been that of employee and employer. The substitution argument thus failed.
"The commissioner had also rejected the want of mutuality argument principally as he considered that the requirement of mutuality might be satisfied by the obligation, on the one hand, to work and on the other to remunerate. That decision was one that was certainly open to him and thus could not be interfered with."