Synaptek IR35 appeal: day two court report
Conrad McDonnell (CM) counsel for Gordon Stutchbury (GS) spent another 90 minutes finishing his case this morning before the Revenue’s counsel Clive Sheldon (CS) started his response which carried on for an hour before and an hour after lunch, finishing at 3pm. There was then another hour or so of final points from CM before Mr Justice Hart (JH) concluded that he would give his judgement in writing but because of other pressures this would not be for at least two weeks. We are therefore left on tenterhooks until JH can deliver his verdict......
General observation
This case has highlighted how difficult it is to form a view as to how a case of this type is progressing. If I had been asked at midday – just after CM sat down - how it was going I would have said that it was looking pretty hopeful for as CM seemed to have made some very good points. An hour later after CS had addressed half the case made by CM I went into lunch feeling far less hopeful!
As was the case at the Judicial review of IR35 there were pronounced differences in style between the two barristers. Both are young – in their early 30’s. But there the similarities stop.
CM is quiet, almost diffident and rather academic seeming. His manner was a little hesitant with some long pauses. He also seemed a little unfamiliar with his material as if he had not seen it for a week or two. Hence he frequently had to hunt for references to guide the Judge as to the correct document in the document bundles and, on many occasions, it was the Revenue’s Counsel who actually supplied the reference!
Quite how this affects the Judge’s perceptions of the arguments is hard to know. Certainly JH was always polite and patient and never showed any exasperation with the hesitations and delays.
By contrast CS was far more certain, confident and direct, always on top of his material and quick with his references.
The arguments
CM started the morning comparing this case with the case that the General Commissioners (GC) had referred to in their case stated – FS Consulting – a Special Commissioners from early 2002 where Special Commissioner Nuala Brice had found a Mr Simpson to be a disguised employee for IR35 purposes. In the Synaptek case the GC had stated that many of the facts were similar to the FS Consulting case and had implied that their reasons for finding that GS was a disguised employee were based on similar reasoning.
CM argued that the facts were not the same and the GCs were in error in so implying. He also argued that the GCs should have given their reasons for their decisions in the same way as Nuala Brice had done in her judgement in the FS Consulting case. In his arguments CM cited a case English & Emery (?) where it had been concluded that “justice will not be done if it is not apparent why one has won and one has lost”.
CM argued that this was the case here as the case stated from the GC’s gave no real insight or reasoning as to how they had weighed up the factors.
While comparing the two cases JH made the helpful observation (which CM had overlooked) that while in the FS case the contractor had only ever worked for one client at a time GS had had several coterminous contracts. JH observed, “This may be an extremely important consideration”.
CM then returned to the issue of being in business on your own account. He argued that Braithwaite and Market Investigations made it clear that this was the starting point and you then examined individual contracts to see if they were part of carrying out your profession or business.
He also referred again to the Mr Justice Burton finding in the judicial review that IR35 was intended only to counter situations where an employee uses an intermediary to shelter himself or herself from tax. He also pointed out that Dawn Primarolo had made the point publicly that IR35 was not intended to affect real businesses. In his view as GS had shown to the GC’s satisfaction that he was in business it was up to the Revenue to show why he should not be taxed as such.
CM then ran through several basic points again – use of tools and equipment – and substitution. Somewhat surprisingly he dismissed substitution as not being a critical factor here – despite the fact that there was a substitution clause in the disputed series of contracts – both prior to May 2000 and again from September 2000 - although it had been removed between May and September 2000.
CM also cited mutuality of obligation (MOO) again as being a key issue and went through the recent judgement in the Carmichael case (guides who worked occasionally at the Nuclear Power station) while also citing the Nethermere case from 1984. He argued that GS did not have any mutuality of obligation with EDS as EDS had no obligation to provide work to GS. For example had there been a power cut at the client such that no work was possible for a day then Synaptek would not have been paid for that day.
CM concluded with a summary of what he believed were the options available to JH based on case law. JH could conclude that:
1. Based on the facts set out in the GC’s case stated that the only proper construction in law was that the hypothetical contract was not a contract of employment, or
2. JH could conclude it was impossible to decide if there was an error in law because the case stated did not give any reasons as to why the GC reached its conclusion
3. JH could remit it back to the GC for further and specific findings of fact
4. JH could conclude that the GC’s decision was one which it was possible to reach on the facts and that sufficient reasons had been given.
Looking Good?
As I said earlier at this stage it seemed to be looking pretty good for GS. However CS now began his counter arguments.
In his view the GC’s decision was tenable on the facts before them and the High Court had no grounds to disturb that decision.
He then referred JH to the Taxes Management Act, which stated that the role of the High Court was to hear and determine any case stated brought before it and to reverse, uphold, remit or amend it as necessary. Hence on the issue of the incorrect dates in the original decision JH was able to amend the dates or the clients i.e. he could find that GS was a disguised employee of EDS from September 2000 and ITSA from May 2000.
CS tried to knock down a fundamental argument of CM – namely that the issue of constructing the hypothetical contract under IR35 must be a question of law and not fact. In CS’s view this would mean that every Commissioner’s decision on an IR35 would be capable of being appealed because the final issue of the hypothetical contract would always be a matter of law. This CS argued must be wrong.
In his view the hypothetical contract was a mixed issue of law and facts, which by tradition could not be re-examined on appeal. In the FS Consulting case the special commissioner had said it was an issue of fact not law.
Hence in his view if the GC’s decision was at least tenable on the facts they had, then it could not be disturbed.
JH noted that different sets of Commissioners could reach different conclusions on the same facts – “this disturbs me”.
However CS countered that this was the way the system worked. He made the point that were it the Revenue appealing the decision then it would be equally difficult for them to overturn the decision as it was for GS.
According to CS the Appeal Court had to decide if the GC were misdirected to the extent that no reasonable Commissioners could have reached that decision. In his view they were not. There was adequate evidence on which the GC reached its conclusions; there were many facts that supported their decision.
JH again noted that with exactly the same contract someone could be held to be an employee and another could be held to be self employed. Again CS confirmed this was so but it was for the GC to weigh the facts and make the decision. CS then seemed to demolish one of CM’s main arguments – that the GC’s decision was not adequately explained as to its rationale. This CS noted was entirely acceptable because the legislation governing a General Commissioner’s case stated (the General Commissioners Jurisdiction Procedures Regulations 1994) only required that they set out what the facts are and state their conclusion. No justification or rationale was required.
If correct this seems to have been a surprising point for CM not to have been aware of as it undermines much of his argument that it was unfair in law for GS not to have a clear explanation as to why the GC’s reached their decision!
CS then pointed out that had GS taken his case to the Special Commissioners then he would have had written justifications as the Specials are required to justify their decision – hence the additional information given in the FS Consulting decision.
CS emphasised his points by stating that what JH had to decide was “could the GC have reached their decision on the basis of the facts that they found”? In CS’s view they certainly could.
In business on your own account
CS then looked at the in business on your own account issue. Just as CM had quoted Mr Justice Burton’s comments in the judicial review so did CS. However he drew attention to his comment regarding the Charlotte example in the Revenue’s IR35 guidance that: “She may be self-employed for much of the year, and yet, in relation to a particular assignment, perhaps by virtue of its length or its specific arrangements, she may be considered as an employee for the purposes of IR35.”
CS accepted that the GCs had found that Gordon was in business on his own account. But that did not mean that he was for the purposes of this engagement. It was also significant that when GS first wrote to the Revenue to seek their opinion on his three contracts he had indicated that the contract with ITSA/EDS was by far the larger part of his income. With requirement to do 37.5 hours a week it was in effect a full time contract. Clearly unlike the Hall and Lorrimer case GS was largely dependent on one paymaster.
Mutuality of Obligation - MOO
On the issue of MOO CS accepted that this was a decisive factor without which there cannot be a contract of service. CS noted that the case that CM cited – Carmichael related to a global umbrella contract – where the overall arrangement may not be employment but day by day there may be obligations. Many cases involving MOO were cases where the claimant sought employment rights for which continuity of service was an issue.
CS argued that the basic criterion for MOO was the so-called wage/work bargain – a requirement to provide personal service for which payment would be received. In his view Synaptek was clearly required to provide GS’s services for 37.5 hours a week for which payment at £42 an hour would be made.
Hence the GC was entitled to find that MOO existed. In his view CM’s view of MOO was wrong and GS had erred in law in his submissions to the GC. GS had argued that there was no MOO because EDS was not obliged to offer more work when the contract was finished and Synaptek was not obliged to accept it. It was a fixed term contract and during the term EDS would offer work and GS would do it. The contract SL signed with the agent, NESCO, said that the client “will” offer work to SL and SL will do it. It did not say, “if the client offers work” or “when the client offers work”.
The contract also specified a “normal” working week of 37.5 hours and in CS’s view the only proper interpretation is that the client will provide the work and GS will do it.
CS opined that the GC had considered the pertinent factors. If the High Court could identify a material factor that they had overlooked then it could overturn the decision. But there was no such additional factor.
At this point JH noted that he thought one major inconsistency in the contract was the absence of a non-competition provision to prevent GS from carrying out work for a competitor of EDS while still working at EDS. For example GS could advise a competitor on securing a contract at another Government department, which could be in direct competition with EDS. Surely JH argued an employment contract would contain such a prohibition?
At this point CS appeared to make his only obvious error. He cited the clause in the Synaptek/NESCO contract which prevented Synaptek for a period of 6 months from following termination of the contract, without written permission from NESCO, from being engaged in the provision of services similar to those supplied by Synaptek under the contract to the Client or any associate of the client.
In CS’s view this clause prevented GS from doing any work for anyone for six months if the work was similar to that which he had done for EDS! Clearly CS was confused as it is patently obvious that this clause is the usual agency clause to restrict EDS from poaching GS or to stop GS from working direct for EDS or going via another agency.
It was not clear whether JH appreciated CS’s error and accepted that Gordon’s contract did not have any clause that prevented him from working for a competitor of EDS even while he was working with EDS. Somewhat surprisingly CM did not make this point clear in his final comments – apparently in his view JH had understood that this clause did not operate in the way CS suggested. I hope he was right.
CS concluded by summarising the other main status issues – like control, use of equipment, integration, risk etc and argued that they had all been considered by the GC who had formed their own reasonable view of the matter. Hence in his view there was no reason to overturn their decision.
Almost finished!
At 3pm CM made his final responses to the points CS had made. He identified two key issues. First was the requirement to consider the “arrangements” between the worker and the client and construe the hypothetical contract a question of law or one of mixed law and fact? In CM’s view it was inconceivable that assessing a hypothetical contract could be a question of fact. It must be a question of law.
The other main issue was MOO. Here in his final arguments I rather thought that CM seemed to lose his way a bit. His main point seemed to be that had GS not been able to work for reasons due to the client rather than his own circumstances then he still would not have been paid. Hence EDS was not obliged to give him work or pay him regardless.
So, for example, CS argued that EDS could have terminated him without giving him the 4 weeks’ notice laid down in the contract and need not have paid for those 4 weeks. Synaptek could claim damages under breach of contract but the damages would not necessarily have been four 37.5 hour weeks at £42 an hour. Damages would take into account what his loss had been after he had done his best to mitigate the loss. So if he had found new work a week later then the loss would be the difference between 4 weeks at the EDS rate and the new earnings for the same period.
CM also made the point that the chain of contracts meant that while MOO looked for an obligation between EDS and GS the obligation to pay was actually that of the agency NESCO not EDS.
JH appeared to be a little confused by the line of CM’s final arguments on MOO and I must admit I was also struggling to understand the arguments. However this brought CM’s arguments to an end and after a final couple of points from CS in response JH concluded the day at 4pm saying that he would not give his decision now but would hand it down in writing. Because of other commitments he did not think this would be for at least two weeks.
Conclusions?
So – who will win? It’s very difficult to say. If fairness is at all relevant then Gordon Stutchbury should win the appeal. It seems clear that 4 times out of 5 he would probably have won at the Commissioners and the Revenue would be facing a very difficult task on appeal. Many of the points made by his counsel seem equally valid in terms of the unfairness of the decision.
But if the only pertinent issue is whether the GC have made a fundamental error on a point of law based on the facts as they found them then I think it is quite likely that JH will conclude that, even if he disagrees with the GC’s decision he cannot say that their decision was perverse. I think he is undoubtedly unhappy that is not totally clear from the case stated quite why the GC’s reached their conclusion.
If he is to overturn their decision then I think he has to conclude that they made a fundamental error in law in either the issue of MOO or in their approach to being in business on your own account. I rather suspect that he will find it difficult to argue either. It appears to me that on MOO there is no evidence to show that GS would not have been paid if, for example, EDS had sent him home for a couple of days because the client’s mainframe was down and there was nothing for GS to do. In the 6-month period in question it seems that GS always worked at least 37.5 hours.
On the issue of being in business on your own account I think that there is enough doubt raised by CS that being in business on your own account does not always totally override any other considerations relating to the specific contract.
Hence JH may conclude that he would not have reached the same decision regarding the significance of being in business as the GC’s did, but he may not be able to say they were wrong in law and that no other Commissioners would not also have reached the same conclusion. If that is the case then Gordon may well lose.