Construing multi-party labour contracts: ICM (UK) Ltd v HMRC

The recent Upper Tribunal (Tax and Chancery Chamber) decision in Island Contract Management (UK) v HMRC [2015] UKUT 0472 (TCC) addressed the correct approach to tri-partite employment contracts and the territorial reach of the Construction Industry Scheme (“CIS”).

Island Contract Management (UK) (“ICM (UK)”) contracted with construction firms and agencies to supply them with the services of individual construction workers. The construction workers did not enter into written contracts with ICM (UK), instead choosing to contract with ICM (UK)’s holding company in the Isle of Man (“Island”). Under the CIS, a contractor is obliged to make deductions from any payment to a sub-contractor on account of income tax unless the sub-contractor has a gross payment certificate. ICM (UK) held a gross payment certificate, enabling it to receive gross sums from construction firms and agencies, but Island did not. When the construction worker provided his services, the construction firm or agency paid ICM (UK) a gross sum, which ICM (UK) paid onto Island without deduction, and Island then paid the individual construction workers the gross sum, less a 5% administration charge.

HMRC issued assessments against ICM (UK) for approximately £42,750,000, contending that ICM (UK) should not have made payments to the construction worker via Island without deduction. ICM (UK) appealed, arguing that the insertion of Island into the chain of construction contracts meant that deductions under the CIS did not have to be made because:

(i) there was no direct contract between ICM (UK) and the construction worker; and
(ii) as Island was outside the territorial scope of the United Kingdom, it did not have to make deductions under the CIS.

The First-tier Tribunal (Tax Chamber) found that Island was merely a paying agent and that there was a direct implied contract between ICM (UK) and the construction worker. Consequently, ICM (UK) was obliged to make deductions under the CIS before making payments to the construction worker via Island.

The First-tier Tribunal dismissed ICM UK’s appeal and that decision has now been upheld by the President of the Upper Tribunal (Rose J). Applying the principles of contractual interpretation in multi-party contracts set out by Lord Neuberger in HMRC v Secret Hotels2 Ltd (formerly Med Hotels Ltd) [2014] UKSC 16, Rose J held that the correct characterisation of the contractual relationship between Island and the construction worker was not one of contractor and subcontractor but of agent and principal. Consequently, Island was not contracting with ICM (UK) as principal but as the agent of the worker. As the principals to the construction contract were ICM (UK) and the worker, deductions should have been made by ICM (UK) under the CIS.

Rose J also rejected a new argument that ICM (UK) could make payments to Island without deductions because the Isle of Man was outside the United Kingdom’s jurisdiction. She held that the fact that Island was outside the jurisdiction of the United Kingdom, “does not take the whole chain out of the territorial scope of the legislation” in circumstances where the construction firm, agency, ICM (UK), construction worker, and construction work were all in the UK (paragraph 80).

Akash Nawbatt and Georgia Hicks appeared for the Respondent. 

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