Usetech Ltd v Young (Hm Inspector of Taxes)

Under the IR35 legislation, the court must construct the hypothetical direct contract required by the legislation from all relevant contractual arrangements and circumstances. A substitution clause in an intermediary contract does not automatically prevent an employment relationship. Its significance depends on its true scope and the circumstances as a whole. A genuine and extensive right to substitute may be decisive, but a limited or exceptional power is only one indicium.

Mutuality is not absent merely because work may sometimes not be provided. A continuing contract of employment may exist where the putative employer must provide work or pay a retainer for unworked time. An appeal from the Special Commissioners lies only on an error of law, not on the evaluation of fact and degree.

Usetech Limited, a one-person company owned and operated by Mr William Hood, supplied his specialist services to ABB Vetco Gray through NES International Limited. Usetech and NES contracted at one level, while NES and ABB contracted at another. The arrangements operated during a 17-month engagement beginning in June 2000.

The Inland Revenue decided that the IR35 provisions applied for income tax and national insurance purposes. The Special Commissioner dismissed Usetech’s appeals, holding that the hypothetical direct contract between Mr Hood and ABB would have been a contract of employment. Usetech appealed on two alleged errors of law: the effect of a contractual substitution clause and an alleged absence of mutuality of obligation.

1. The appeal was dismissed. The Special Commissioner’s decision was open to him on the evidence, and Usetech had not shown an error of law.

2. The hypothetical contract required by Finance Act 2000 Schedule 12 and the Social Security Contributions (Intermediaries) Regulations 2000 had to be constructed by considering the actual contractual arrangements, including the upper-level NES/ABB contract. The absence of knowledge by Usetech or Mr Hood of that contract did not prevent it from forming part of the relevant circumstances. The self-assessment machinery did not alter substantive liability.

3. The hypothetical direct contract would not have contained the substitution clause in the Usetech/NES contract. ABB had contracted for Mr Hood’s services, the NES/ABB contract contained no substitution provision, and the evidence supported no realistic inference that ABB would have agreed to one. The substitution argument therefore failed.

4. Even if a comparable substitution clause had formed part of the hypothetical contract, its presence would not automatically have made employment legally impossible. The relationship had to be evaluated in the round. The extent of the substitution right was material. A far-reaching right such as that in Express and Echo Publications Ltd v Tanton might be decisive, whereas a limited or conditional right was an indicium to be weighed with the other circumstances.

5. The mutuality argument also failed. Although a relationship involving casual offers of work may comprise separate engagements rather than one continuing employment contract, the 17-month engagement was continuous and substantial. The NES/ABB arrangements required a minimum of 37.5 hours’ work weekly, or payment for that minimum. The hypothetical contract therefore contained sufficient mutual obligations.

6. The decision did not establish that the Special Commissioner was bound to reach the conclusion he reached on the overall question of employment status. That question remained one of fact or mixed fact and law for the fact-finding tribunal.

The Special Commissioner dismissed Usetech’s income tax and national insurance appeals on 12 March 2004. The High Court (Chancery Division) dismissed Usetech’s appeal, which was confined to alleged errors of law concerning substitution and mutuality.