Judgment summary
This appeal concerned whether a scheme implemented by Bilfinger Salamis UK Limited ("Bilfinger UK") successfully avoided a liability to secondary Class 1 national insurance contributions (NICs) by transferring its employees to a Guernsey subsidiary, Bilfinger Guernsey, while those employees continued to work on Marathon Oil UK Ltd's platforms in the North Sea (1-8).
The First-tier Tribunal (FTT) had held that the scheme did not achieve its objective because the host employer provision in para. 9 of Sch. 3 to the Social Security (Categorisation of Earners) Regulations 1978 applied, making Bilfinger UK liable to secondary Class 1 NICs of £2,914,408 for the period 6 January 2009 to 5 April 2014 (1, 10).
Bilfinger UK appealed, arguing that the FTT had erred in law regarding the degree of direction or control required for personal service to be "made available" to a host employer under para. 9 (32).
The Upper Tribunal dismissed the appeal, holding that the FTT was wrong to require some degree of direction to lie with the host employer as a matter of law, but that this error was immaterial because the FTT's factual conclusion that personal service was made available and rendered to Bilfinger UK would inevitably have been reached applying the correct legal test (78-83).
Background
Bilfinger UK, a company incorporated in Scotland and based in Aberdeen, had for some time supplied services to Marathon in connection with Marathon's operation of oil platforms on the Brae field in the North Sea, using its own employees and accounting for secondary Class 1 NICs on their earnings (2).
When the relevant contract came up for renewal, Marathon requested, if possible, an employment model that would not incur a liability to secondary Class 1 NICs, because under the proposed contracts Marathon would bear the economic cost of those contributions even though it would not be the person liable to pay them to HMRC (3).
Bilfinger UK won the tender and implemented an offshore employment model. It incorporated Bilfinger Guernsey Limited as a wholly-owned subsidiary, transferred its permanent employees to Bilfinger Guernsey with effect from 1 January 2009, and entered into a series of contracts: Bilfinger UK with Marathon for "industrial services"; Bilfinger Guernsey with Bilfinger UK for labour, scaffold and equipment; Bilfinger UK with Bilfinger Guernsey for human resource services; and Bilfinger Guernsey with Voyonic Crewing Limited for payroll and administration services. There was no contract between Marathon and Bilfinger Guernsey (5-7).
The arrangements had effect from 1 January 2009 until 1 April 2014, when the employees were transferred back to Bilfinger UK and the contractual arrangements unwound, apparently because of the Social Security (Categorisation of Earners) (Amendment) Regulations 2014 (8).
It was common ground that Bilfinger Guernsey was not itself liable to pay secondary Class 1 NICs because it lacked the necessary residence or presence in Great Britain (9). HMRC contended instead that the host employer provision in para. 9 of Sch. 3 to the 1978 regulations applied, making Bilfinger UK liable as the host employer to whom the personal service of Bilfinger Guernsey's employees was made available (10).
Core dispute
The issue was whether Bilfinger UK's assessment to secondary Class 1 NICs was correct, and in particular the meaning of "made available" in para. 9 of Sch. 3 to the 1978 regulations, referred to throughout as the host employer provision (11, 24).
The FTT had found that the host employer provision required "some" degree of direction (not amounting to a legal right) to lie with the proposed host employer for personal service to be regarded as "made available" to it, and concluded on the facts that such direction lay with Bilfinger UK (25-31).
Bilfinger UK's ground of appeal was that, while the FTT correctly held that some degree of direction was required, it had erred either by fixing too low a degree of direction as a matter of law, or by concluding that the facts found were sufficient to meet the required degree of direction (32). Bilfinger UK submitted that at minimum the host employer must have power to decide what tasks the individual actually does day-to-day, and that on the facts such power always lay with Bilfinger Guernsey (37-38).
HMRC's primary case was that the host employer provision contains no requirement for direction or control by the host employer at all; alternatively, if it did, the FTT was correct that the required level was necessarily lower than that required for a contract of employment and that the facts found satisfied it (39).
Court findings
The Upper Tribunal applied the modern approach to statutory interpretation from R (O) v Secretary of State for the Home Department [2022] UKSC 3, the Ramsay principle as restated in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, and the approach to construing ordinary words in a statute from Brutus v Cozens [1973] AC 854 (40-47).
The Tribunal considered the context of s.7(2) of the Social Security (Contributions and Benefits) Act 1992, under which the 1978 regulations were made, concluding that it conferred a wide discretion on the Secretary of State to prescribe a secondary contributor in cases considered appropriate, not confined to ambiguity as to who the secondary contributor was (48-50).
The Tribunal noted that para. 2 of Sch. 3 to the 1978 regulations expressly used the language of "supervision, direction or control", whereas para. 9 did not, which was said to be, at its lowest, surprising if a requirement for direction was intended in para. 9 (52-54). The Explanatory Note to the amending 1994 regulations was considered but found to add little, being a simple, non-technical description referring to "workers seconded" without providing an exhaustive definition of the mischief addressed (55-60).
The Tribunal held that "made available", "rendered" and "for the purposes of the business" are ordinary, everyday words to be given their ordinary meaning, with nothing in the context suggesting an unusual sense (61-66). It rejected the submission that "made available" necessarily connotes a power of direction, and rejected the submission that the provision is aimed at situations "approximating" to a contract of employment or corresponding to "secondment", since this would substitute other words and concepts for those actually used by the law-maker (66-70).
The Tribunal concluded that the FTT was wrong to hold that some degree of direction must necessarily lie with the host employer, and that this was an error of law, though the presence or absence of direction may still be a relevant factor in applying the statutory test (72-78).
Applying the test in Degorce v HMRC [2018] 4 WLR 79 as to materiality, the Tribunal found that the FTT's error was immaterial: there was no realistic possibility that the FTT would have reached a different conclusion, since it had in fact applied a higher standard than required and had nonetheless found that personal service was made available and rendered to Bilfinger UK for the purposes of its business (80-83).
Outcome
The Upper Tribunal held that the FTT erred in law in requiring some degree of direction to lie with the host employer as a matter of law, but that this error was immaterial to the outcome (78, 83).
The appeal was dismissed, and the FTT's decision that the host employer provision applied throughout the relevant period, so that Bilfinger UK was correctly assessed to secondary Class 1 NICs, stands (83-84).
Major issues / areas of contention
- Whether the host employer provision in para. 9 of Sch. 3 to the Social Security (Categorisation of Earners) Regulations 1978 requires some degree of direction or control to lie with the proposed host employer for personal service to be 'made available' to it
- Whether the FTT erred in law in fixing too low a degree of direction, or in finding the facts sufficient to meet the required degree of direction
- The correct approach to interpreting ordinary, non-technical words used in the host employer provision
- Whether the offshore employment scheme, viewed as a whole applying the Ramsay principle, resulted in the personal service of Bilfinger Guernsey's employees being made available to and rendered for the business of Bilfinger UK
- Whether any error of law by the FTT was material to the outcome under the test in Degorce v HMRC