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I'VE JUST FINISHED an introduction to wine-tasting course that I was given as a Christmas present. One of the things I've learned is that wines made from the Muscat grape are recognisable because of their 'grapey' aroma. You would have thought that was true of all wine, but if you think about it very few wines actually have a taste reminiscent of non-fermented grape juice. I've also discovered that, according to some authorities, all the grape varieties in the world may be descended from Muscat vines. So it is a straightforward grape variety that still smells the same after all the steps it goes through to be turned into wine, and it may well be at the root of all viticulture.
It's admittedly a tenuous link, but the same may well be true of another Muscat; the eponymous employment law case, Cable & Wireless plc v Muscat [2006] EWCA Civ 220. It seems to me that it could be the root of a definition of employment that could sweep away the need for the IR 35 and Managed Service Company rules, and it could do that by cutting through the steps that are gone through to disguise what is really an employee/employer relationship.
Muscat facts
The details of the case were set out in detail by Anne Redston when she wrote about it in her article last year, 'E-Nuff is not enough' (Taxation, 18 May 2006, page 183), but are repeated here for ease. If you are confident that you understand the facts and the decision in Muscat and the previous case of Dacas, feel free to skip to 'Implications'.
Mr Muscat was originally employed by a company aptly named Exodus International (EIL). In 2001 it wanted to reduce its employee headcount to facilitate a buyout, but it still wanted to retain his services. He was therefore told that he had to operate through a personal service company, and formed E-Nuff Comms Ltd, which billed EIL for Mr Muscat's work.
In 2002 EIL was taken over by Cable & Wireless (C&W). Mr Muscat was told that C&W did not deal with contractors direct, and that he would have to deal with them through an agency, the rather alarmingly named Abraxas plc (look him up on Wikipedia ...). From then on it was Abraxas and not C&W who paid E-Nuff's invoices, but everything else stayed the same. Mr Muscat continued to be referred to as an employee in the departmental structure, he had a company mobile and laptop, agreed his leave with C&W, etc.
Then C&W told him that his services were no longer required; his last contract ended on 31 December 2002. In March 2003 Mr Muscat lodged a claim for compensation for unfair dismissal, on the basis that he was an employee of C&W, and that his employment was to be treated as lasting for more than one year because it fell within the 'TUPE' regulations for business transfers.
By the time the case got to the Court of Appeal, there was no longer any dispute that he was an employee up to the point at which he signed the agency agreement with Abraxas (on behalf of E-Nuff). The only dispute was whether it was possible, in the face of a clear statement in that agreement that it was the whole of the contract between the parties, to say that there was an implied contract of employment between Mr Muscat and C&W. This was said to be necessary following the case of Dacas v Brook St Bureau UK Ltd [2004] EWCA Civ 217.
Dacas
Even more briefly, the facts in Dacas were that Mrs D worked as a cleaner for Wandsworth Borough Council, but was provided by Brook St, who paid her wages. The Employment Tribunal held that neither Brook St nor Wandsworth were her employers; Wandsworth because she was paid by Brook St, and Brook St because control of her work, and the obligation to provide it, was with Wandsworth.
She appealed to the Court of Appeal, but only in respect of Brook St. This appeal failed, on the same grounds of lack of control and mutuality of obligation, but the judges also commented on the considerations which should be taken into account by tribunals in analysing these 'triangular' situations of worker, agency and end-user. By a 2-1 majority, they said that tribunals should consider whether there is an implied contract of employment between the worker and the end-user, which can be inferred from the express contracts between the parties and also from their conduct. One judge said that Mrs Dacas almost certainly was employed by Wandsworth, but the dissenting judge thought such a finding was impossible if the control of the work and the obligation to pay were in different agencies.
In applying this to Mr Muscat, the Court of Appeal came to a few key conclusions:
- The view of the majority in Dacas was correct and, although the guidance given to tribunals was strictly obiter, the tribunal in Muscat was right to follow it.
- The fact that the written contract between E-Nuff and Abraxas said that it was the whole of the agreement did not prevent a contract being implied between Mr Muscat and C&W.
- Because of the prior employment it was clear that this was a case where a contract of employment was a 'necessary inference' as required by the authorities, although other cases might not be so clear.
Implications
Looking at the requirements of ITEPA 2003, Part 2 Chapter 8 (the IR 35 rules), it is clear that Muscat could be ground-breaking. Chapter 8 is intended to catch situations where 'if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client' (s 49). Muscat provides a way of saying, not that there WOULD be a contract of employment, but that there actually IS one. The word 'employment' bears its normal meaning in taxation, apart from also including office holders for ITEPA 2003 purposes. The main mischief aimed at by Chapter 8 — people being treated as non-employees when in business reality they are employees — seems to be similar to that aimed at by Muscat, and particularly by Dacas, where the court was concerned that Mrs Dacas seemed to be employed by no-one.
There no longer appears to be any need for Chapter 8 — just apply Muscat instead. Anne Redston's conclusion in her article was that it was 'more likely than not that the majority of those who fail IR 35 will, following Muscat be found to have implied contracts of employment with their clients.
Arguably it could also be used to impact on the Managed Service Company (MSC) rules as well. The new Chapter 9 is aimed at those who receive more than they would if all their money was taxed as employment income, but where the worker is not genuinely in business on his or her own account, through a personal service company. Muscat would again seem to apply to most of the cases where problems could arise. In particular, it prevents a company being used as a way of getting 'home to work' travel expenses on the basis of each engagement being a temporary workplace.
HMRC view
However, Taxation understands that HMRC's position on Muscat, having taken Counsel's advice, is that rulings by the courts for employment law purposes, specifically where the courts rule that the end client is the employer for employment law purposes, do not affect the operation of ITEPA 2003, Part 2 Chapters 8 and 9.
Anne Redston says that she finds this very surprising. Unless there is a specific provision such as that in the agency rules in Chapter 7 which use the test of control and supervision rather than employment, then there is no such thing as 'employment for tax purposes' and 'employment for employment law purposes'. IR 35 is only relevant where 'the services are provided not under a contract directly between the client and the worker' ITEPA 2003, s 49(1)(b). In the case of Muscat, the court has decided that the services are supplied under the implied contract directly between the client and the worker — it is for that reason that there is an employment.
That said, in reading the cases I realised that there is one difference between the two. For employment law purposes the Employment Rights Act 1996, s 230(2) defines a contract of employment as being:
'a contract of service … whether express or implied, and (if it is express) whether oral or in writing.'
However, this seems insufficient to cause a problem. There is no lack of 'reality' about an implied contract; the contract is merely implied rather than express. It is hard to see a justification for not applying Muscat for tax purposes. Perhaps the problem is that HMRC do not think it will be robust enough — what judges giveth, judges may take away.
New case - James
Since Anne Redston's article, there has been some attempt to rein back the principle. It has been suggested that this can particularly be seen in the decision of the President of the Employment Appeal Tribunal, Mr Justice Elias, and others in the case of James v Greenwich Council [2006] UKEAT/0006/06/ZT. Ms James had been working for Greenwich Council for five years via agencies prior to her contract being terminated. She tried to claim that, like Mrs Dacas, she was an employee of the end user, but she failed.
Key to this decision were the facts found by the original Employment Tribunal. These included a change of agency part way through the period, initiated by Ms James, a disputed finding that she reported any sickness to the agency and not the council, and that when she was absent from work in the period which led to her contract being terminated, the agency provided another worker in her place.
Nevertheless, there are some quite firm statements from the appeal tribunal that Dacas should be the exception and not the rule, at least in situations where there has been a genuine agency relationship initially. The main scope for the doctrine in Muscat is seen as being where:
'… the agency arrangements were super-imposed on an existing contractual relationship. It may be appropriate, depending on the circumstances, to conclude that arrangements were a sham and that the worker and end user have simply remained in the same contractual relationship with one another, or that even if the intention was to alter the relationship that has not in fact been achieved.'
On the other hand, this is 'only' an EAT decision. Whilst it sets out the EAT's views on what the authorities mean, it is the two Court of Appeal decisions in Dacas and Muscat which are binding.
Who should be responsible?
And finally, is the unwillingness to use Muscat actually a reflection of HMRC giving in to big business? After all, it would shift the onus of deciding on the tax position from the intermediaries to the end users. That was the original intention for IR 35, but it quickly changed in the face of concerted lobbying. HMRC say that the reason for requiring MSCs, rather than end users, to apply PAYE is that:
'In many cases end client businesses engage temporary workers through employment businesses without being aware whether the worker is operating through an MSC or a PSC. It would be unduly onerous to expect end clients to distinguish those workers who operate though MSCs and operate PAYE and NICs, especially where there is a high turnover of temporary workers. The legislation takes the approach that the MSC, which has a permanent, ongoing relationship with the worker, as his employer, should apply PAYE.'
But if that is what employers want, it is easy to achieve it. They simply instruct their agencies to only take on workers directly, not through companies, and to do so on terms that make them employees of the agency, reflecting that 'permanent ongoing relationship with the worker'. Alternatively, if they genuinely want to deal with people trading on their own account, they make it clear that they are prepared to accept suitably qualified and experienced substitutes, thereby clearly escaping any implied contract of employment. What is surely unacceptable is that HMRC avoid upsetting the big businesses who are the end users, thereby allowing them to continue to deny employment rights to workers who should, by any normal definition, be treated as employees of someone. For the tax system to permit a freelance computer consultant to be self employed and therefore not eligible for employment rights is one thing. For it to do the same for office cleaners is another.
