Hudson Contract Services Ltd v Revenue & Customs

For the construction industry scheme, the court must identify the contractual nexus under which labour is furnished. Express contracts must be considered with the totality of the arrangements, but they cannot be disregarded merely because they were designed to satisfy the statutory conditions. An implied contract between an operative and an end-user arises only where it is necessary to give business reality to the arrangements and create enforceable obligations. Where the parties have expressly excluded such a contract, and the arrangements are genuine rather than a sham, the court should not imply one without necessity. The relevant relationship is that existing when the work starts.

Hudson appealed against a Special Commissioner’s decision concerning its entitlement to a certificate under section 561 of the Income and Corporation Taxes Act 1988. Hudson contracted with construction clients and operatives, taking contractual responsibility for labour and payment while the clients and operatives negotiated the work and remuneration. The Special Commissioner concluded that no contract was to be implied between the clients and operatives and that Hudson’s business therefore included furnishing labour for construction operations.

HMRC cross-appealed that determination, arguing that Hudson was only a payroll facility and that a contract existed between the clients and operatives. The central issue was whether Hudson’s business satisfied section 562(2)(a), as applied to companies by section 565(2).

1. The cross-appeal failed. The substantive appeal was withdrawn pursuant to the order of Lawrence Collins J dated 9 October 2006.
2. The relevant question under sections 560(1)(a), 562(2)(a) and 565(2) of the Income and Corporation Taxes Act 1988 was the contract under which labour was furnished or arranged for the client. It was first necessary to ascertain the contractual nexus between the parties.
3. The guidance in Dacas v Brook Street Bureau [2004] IRLR 358 required consideration of the total situation, not merely the written documents. The possibility of an implied contract did not mean that such a contract had to be found.
4. Under The Aramis [1989] 1 Lloyds Rep 213, as applied in Cable & Wireless PLC v Muscat [2006] EWCA Civ 220, an implied contract arises only where necessary to give business reality to the transaction and create enforceable obligations. Conduct consistent with an intention not to contract is insufficient.
5. Here, the Hudson-client and Hudson-operative contracts expressly provided that the operative contracted with Hudson and not with the client. Those arrangements imposed corresponding obligations on Hudson. Unless the contracts were a sham, their intended legal effect had to be accepted. The Special Commissioner was therefore entitled to conclude that no client-operative contract was implied.
6. The material point was the relationship when the work commenced. Any later implied contract arising from subsequent conduct would not determine the contract under which the labour was initially furnished.

• High Court (Chancery Division): The court heard an appeal from the Special Commissioner’s decision dated 23 August 2005. HMRC’s cross-appeal was unsuccessful. The substantive appeal was withdrawn.