HM Revenue & Customs v Larkstar Data Ltd

In deciding whether an intermediary arrangement falls within the IR35 legislation, the court must construct the hypothetical direct contract required by the legislation and ask whether it would be a contract of service. The exercise considers the actual arrangements and their surrounding circumstances, including the contractual terms.

Mutuality of obligation during each engagement may support a contract of employment. The absence of an obligation to offer, or accept, further work after a fixed-term engagement does not prevent that conclusion. Control remains relevant, particularly where the tribunal has failed to account for the limited significance of day-to-day control over a skilled professional and has made an unsupported finding about working hours.

HM Revenue & Customs appealed against the General Commissioners’ decision allowing Larkstar Data Ltd’s appeal against determinations of PAYE income tax and social security contributions for the period 6 April 2001 to 5 April 2003.

Larkstar supplied Mr Alan Brill’s specialist computer consultancy services to MBDA through TPS. HMRC argued that the arrangements were within Schedule 12 to the Finance Act 2000 and regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000. The central issues were whether the General Commissioners had applied the hypothetical-contract test correctly, and whether they had misdirected themselves on control, mutuality of obligation and related factors.

1. Appeal allowed and matter remitted. The decision of the General Commissioners was set aside. The matter was remitted for a de novo rehearing by a differently constituted panel, with costs to HMRC subject to detailed assessment if not agreed.
2. The statutory question was whether, if the services had been provided under a direct contract between Mr Brill and MBDA, he would have been regarded as employed by MBDA. The court accepted the analysis in Usetech Ltd v Young (HM Inspector of Taxes), 76 Tax Cases 811, that the exercise involves constructing a hypothetical contract, while examining the actual facts, legal relationships and terms of the contracts forming the arrangements. The Commissioners’ failure to use that precise description did not itself establish an error because their Case Stated showed that they had undertaken the required exercise.
3. The Commissioners did, however, misdirect themselves on control. They failed to take proper account of the principle stated in Morren v Swindon & Pendelbury Borough Council, [1965] 2 All ER 349, that control is important but is not decisive, particularly in the case of a skilled professional whose employer may not direct how the work is done. They also made an unsupported finding that Mr Brill was merely encouraged, rather than required, to work MBDA’s core hours. That finding might have affected the employment analysis.
4. The Commissioners also misdirected themselves on mutuality of obligation. Under Cornwall County Council v Prater, [2006] EWCA Civ 102, the relevant mutual obligations may arise during each individual engagement. The absence of an obligation to offer, or accept, further work after the engagement ends is irrelevant to whether that engagement is a contract of service. The Commissioners treated that absence as a compelling indication of independent contracting and therefore applied the wrong legal approach.
5. The court declined to determine the remaining factual and legal issues. It held that the builder analogy used by the Commissioners was unhappy but was not, by itself, an error of law. A rehearing was necessary because the court could not be satisfied that the Commissioners would have reached the same conclusion without the identified errors.

1. General Commissioners: allowed Larkstar’s appeal against HMRC’s PAYE and social security determinations.
2. High Court (Chancery Division): allowed HMRC’s appeal, set aside the Commissioners’ decision and remitted the matter for a de novo rehearing by a differently constituted panel. HMRC was awarded costs subject to detailed assessment.