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 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.
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 not by a direct contract with his one-man company, Usetech Ltd, but through a contract between Usetech Ltd and a technical recruitment agency.
Usetech Ltd argued that the special commissioner erred in law and that the IR35 legislation could not apply because of:
(a)The existence of a contractual provision between Usetech and the agency entitling Usetech to provide the services of a substitute in place of Mr Hood (the right of substitution argument);
(b) There being no obligation on the client to provide work for Mr Hood (the want of mutuality argument).
The issues had doubtless been complicated by the interposition of the agency, 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/agency 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 the client 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.
Source:ICLR