M&A Tax update - Nov 08:Layout 1.qxd - Pinsent Masons


M&A Tax update - Nov 08:Layout 1.qxd - Pinsent Masons

M&A Tax Update

A periodic update for those involved in corporate finance on tax

developments relevant to M&A transactions.

If you would like further information on any of the areas covered, please

email veronica.mcmahon@pinsentmasons.com or speak to your usual Pinsent

Masons adviser.

November 2008


Short summaries of each article are

shown below. If you would like to

view the full article, click on the

underlined links. To return to the

start, click on the "Go back" link.

Corporate acquisitions in the current climate - the impact of debt

Although M&A activity has dropped the deals which are still going ahead often involve companies which are heavily laden with

debt. This article looks at the tax issues to consider in these types of deals. Read more

Pension Deficit Indemnities

Given the current difficulties in the financial markets, it is becoming increasingly common to find pension deficits in a target

company. This article looks at the tax implications that may arise in connection with the funding and payment of a pension

deficit liability. Read more

Implementation of Companies Act 2006

On 1 October 2008 certain provisions of the Companies Act 2006 came into force which will have an impact on M&A

transactions. This article looks at the provisions now in force and how these may shape deals going forward. Read more

Expert Determination

The recent case of Owen Pell Limited and Bindi (London) Limited has shown that contracting parties must remember what they

are being bound by when they agree that an expert's determination will be final and binding. This article looks at the detail of

this case which confirms that an expert's decision is binding, even if errors have been made in its conclusions and what can be

done to help the parties' position in such a case. Read more

Update on Demibourne

This article looks at the HMRC guidance on the practical effects of the Demibourne case and the legislation brought in to

address what was considered the harsh result of this case for employers when a worker treated as a self employed consultant is

later re-categorised as an employee. Read more

Employment Status – The Importance of a Right of Substitution

We look at the recent High Court decision in Dragonfly Consulting Limited v HMRC which has confirmed the importance of

unfettered rights of substitution where consultants or other contractors are treated as self-employed. The decision shows the

importance of thorough due diligence and appropriate indemnities to cover this risk on acquisitions, and the need to review the

basis on which any consultants are engaged following completion of the purchase. Read More


Corporate acquisitions in the current climate - the impact of debt

We are facing difficult times in the M&A market and there is a noticeable drop in the number of deals being done. However,

despite the current conditions, there is still some activity in the market place and many of the deals that are going ahead

involve companies which are heavily laden with debt. This gives rise to a number of interesting tax issues which we will focus

on in this article.

Agreement to repay target debt – does this attract stamp duty?

It will often be a term of a company acquisition that the buyer will ensure that the debt of that company is repaid on

completion. It is important from a stamp duty point of view that this is documented in the right way.

In order to avoid paying stamp duty on this agreement to repay the debt, the contract should make it absolutely clear that the

agreement to repay the debt is not consideration for the share acquisition. This can be achieved by making sure that the debt

repayment is not dealt with in the consideration clause and instead there is a completion obligation that the buyer will procure

that the target company repays the debt. The buyer can then put the target in funds (either by way of loan or a share

subscription) to repay these amounts. In this way, it is possible to ensure that the repayment (or the agreement to repay) is not

consideration for the share acquisition meaning that no stamp duty should be payable in respect of such amounts.

How are indemnity and warranty payments taxed when the consideration is nominal?

It was established in the case of Zim Properties v Proctor [1985] TC 42 that the right to court action for compensation for

damages was an asset for capital gains tax purposes. The result of this is that a person who receives compensation or damages

whether by court order or negotiated settlement may be regarded as disposing of the right of action.

Following this very wide reaching decision, HMRC issued Extra Statutory Concession ("ESC") D33 which provides a number of

concessions, including in relation to payments made under warranties and indemnities which are included as one of the terms

of a contract of sale and purchase. ESC D33 provides that if, after the completion of the sale, a payment is made by the seller

to the buyer under such a warranty or indemnity, then the buyer's acquisition cost when they dispose of the asset is reduced

by the sum received, and the seller's sale proceeds are also adjusted. In basic terms, what this means is that it should be

possible for a warranty or indemnity payment to be treated as a reduction in the consideration paid by the buyer so that no tax

liability arises on the receipt of such payment.

We are increasingly seeing sales for a nominal consideration of say £1 with the buyer also agreeing to procure the repayment

of target debt. In these cases it is not possible to benefit from the ESC D33 treatment because there is no consideration to

adjust. As such, these payments are taxable under the principles established in Zim. It is therefore of critical importance for a

buyer to ensure that the tax deed includes a gross up clause so that the buyer is left in the same after-tax position as if there

had been no such tax liability. The position for warranty claims is slightly different in that the amount of tax suffered should

flow through to the quantum of damages so strictly speaking a gross up clause is not necessary for warranty claims.

An alternative to making a warranty or indemnity payment in these circumstances is for the seller to subscribe an amount

equal to the warranty or indemnity claim for deferred shares. In this way the cash ends up in the target company without

incurring a tax charge. The deferred shares would have nominal value and no economic rights and could be bought back by the

buyer for a nominal amount on short notice.

Consideration should be given as to whether the gross up payments should fall within the agreed maximum liability cap or not.

What are the tax consequences of buying impaired debt?

Loan Relationships

Anti-avoidance legislation contained in paragraph 4A of Schedule 9 FA 1996 can apply in certain circumstances in the case of

impaired debt to effect a deemed release subject to tax in the debtor company. Impaired debt is debt which is worth less than

the carrying value of such debt in the accounts of the debtor company. This legislation will apply and a deemed release in the

debtor company will occur if:-

One company acquires a creditor loan relationship and immediately after the acquisition, the debtor company and that

company are connected, and the consideration paid by that company for the debt is less than its carrying value in the

debtor company's accounts.

This situation will therefore arise where a company acquires impaired debt and is already connected with the debtor

company, or where it buys shares in the debtor company – and thus becomes connected – at the same time as it buys the

debt. There are however two important exceptions:-

1. Paragraph 4A will not apply if the debt is transferred from "old creditor" to "new creditor" and they are in the same

group of companies.

2. Paragraph 4A will not apply if the "new creditor" acquires the loan relationship under an arm's length transaction and,

it was not connected with the debtor company at any time in the period beginning four years before the acquisition

and ending 12 months before the acquisition date. This is intended to facilitate the rescue of ailing companies by

unconnected parties.

The amount of the deemed release on which the debtor company will suffer a tax charge is the difference between the

price it pays for the debt and the carrying value of such debt in its accounts.

A previously unconnected company that holds impaired debt becomes connected with the debtor company.

If the period of account of the creditor company ended immediately before the connection starts and if the carrying value

of the debt would have been adjusted for impairment, the amount of the deemed release is the amount of the impairment

adjustment that would have appeared in such accounts.

Stamp Duty

Normally the transfer of loan capital will be exempt from stamp duty because it will fall into one of the available exemptions.

Broadly the transfer of loan capital will be exempt unless the loan instrument:-

is convertible into shares or other securities or carries a right to receive shares or other securities including loan capital of

the same description; or

carries a right to interest:-

- which exceeds a reasonable commercial return;

- the amount of which falls to be determined to any extent by reference to the results of a business or to the value of

any property; or

carries a right on repayment to an amount which exceeds the nominal amount of the capital and is not reasonably

comparable with what is generally repayable under the terms of loan notes issued on the Official List of the Stock Exchange.

Even if the loan instrument is not exempt because it falls within one of the sub-paragraphs above, it may still be exempt if it is

not a "marketable security". Case law suggests that a marketable security must be a security which is capable of being dealt

with on a stock exchange according to the use and practice of stock markets. In order to be a "marketable security", at the very

least it must be transferable. There is an argument that as a loan note issued by a private company cannot be dealt with on a

stock exchange it cannot be a marketable security, however we are not clear if this view is accepted by HMRC. Go Back

Pension Deficit Indemnities

Given the current difficulties in the financial markets, the assets of most defined benefits pension schemes are insufficient to

meet the pension scheme's estimated liabilities and so there is a pension deficit. When a target company participates in a

single group defined benefits pension scheme, then the trustees of the pension scheme can require the seller or the target to

meet the target's share of the pension deficit on sale.

As the amounts involved are often material, it is important to consider carefully the tax implications that may arise in

connection with the funding and payment of that pension deficit liability.

Responsibility for the pension deficit liability

A buyer's position is usually that responsibility for such debts should rest with the seller as they are attributable to the target's

participation in the seller's group pension scheme before completion of the purchase. We would therefore expect a buyer

either to adjust the consideration payable for the target to take account of any pension deficit liability or request an indemnity

from the seller to cover any exposure.

Tax implications of an indemnity payment

The first issue to consider is the tax implications of the seller making an indemnity payment to put the buyer or the target in

funds to meet the pension deficit liability. (This assumes that the seller will not be making the payment directly to the pension

scheme – a point addressed further below.)

As seen above in the earlier article on ‘Corporate acquisitions in the current climate - the impact of debt’, where an

indemnity is included as a term in the sale and purchase agreement then any payment made by the seller to the buyer

pursuant to that indemnity will, by concession (ESC D33), be treated as an adjustment to the consideration paid by the buyer

for the target's shares. If the indemnity payment exceeds the consideration paid then the excess is potentially a taxable receipt

in the buyer's hands and the sale and purchase agreement will often require the seller to gross up indemnity payments to

compensate the buyer for any such tax suffered on receipt. Grossing up can therefore be a particular issue where the pension

liability exceeds the consideration, for example, where the target is sold for a nominal amount.

Often a buyer will not wish to receive funds itself (perhaps due to the cost of putting its subsidiary in funds to meet the

pension deficit liability) and may request that the seller makes the indemnity payment to the target at the buyer's direction. In

those circumstances, there is a further concession which will treat those payments as made to the buyer, thereby adjusting the

consideration paid for the target shares. A seller will usually resist giving gross up protection on payments to a target.

The grossing up risk should be avoided where a contribution is made directly by the seller to the scheme (though, as discussed

below, no corporation tax deduction may be available). Alternatively, any gross up concerns could be dealt with by requiring

the seller to subscribe for deferred shares in the target to the extent that the consideration paid for the shares is insufficient to

be adjusted.

Corporation tax treatment of the payment into the pension scheme

The second issue to be considered is whether tax relief will be available in respect of the payment into the pension scheme

and, if such relief is available, whether the buyer or seller will benefit from that tax relief.

(a) the seller makes the payment into the pension scheme

If, rather than indemnify the buyer against the pension deficit liability, the seller makes the payment directly to the pension

scheme, the payment by the seller may not be allowable for corporation tax purposes on the basis that it will be unable to

show that it is making the payment "wholly and exclusively" for the purposes of its trade and not to facilitate the disposal of

the target or to secure an increased sale price. Generally, HMRC guidance indicates a deduction would only be available to the

seller where it could be shown that the purpose of the contribution was to maintain the seller's reputation and to underpin the

morale of remaining scheme members, and that the target had insufficient resources to meet the liability.

(b) the target makes the payment into the pension scheme

Where the target itself makes the pension deficit payment into the defined benefits pension scheme then the payment will be

deductible for corporation tax purposes.

If the parties have agreed that the seller will benefit from the corporation tax deduction (which we would expect where the

seller is bearing a gross up risk - see further above) then the mechanism for passing back that benefit to the seller should also

be considered:

the seller could make an indemnity payment to the buyer of the pension deficit liability net of the assumed amount of tax

relief. If the assumed tax relief proves not to be available then the seller could be required to make an additional payment

to the buyer to compensate for the non-availability of that tax relief. There is a potential cash flow advantage for the seller

with this option where the legislation requires target to spread tax relief over a period of time;

the seller could make a payment to the buyer of the pension deficit liability and the buyer could agree to repay to the seller

the benefit gained as and when the target's actual tax bill (or that of a member of the buyer's group) is reduced as a result

of obtaining the tax relief.

(c) the buyer makes the payment into the pension scheme

Where the buyer itself makes the payment then it is unlikely to be deductible for corporation tax purposes on the basis that

the payment will not be "wholly and exclusively" incurred for the purposes of the buyer's trade if it has a dual purpose (namely

to benefit both the buyer's and its subsidiary's trades). Go Back

Companies Act 2006 – provisions coming into force on 1 October 2008

Financial Assistance

Before 1 October 2008, subject to certain exceptions, any private or public company was prohibited from giving financial

assistance for the purpose of the acquisition of shares in the company or its holding company. Private companies could use the

'whitewash procedure' to sanction the giving of financial assistance, but this involved, among other things, special resolution

approval, a directors’ solvency declaration and an auditor's report.

As of 1 October 2008, the prohibition on private companies giving financial assistance no longer applies. This is good news for

private companies and should make acquisitions, intra-group reorganisations and public-to-private transactions simpler.

Note, however, that where a private company is considering authorising a transaction that would previously have been

prohibited, its directors must still remain mindful:-

of whether the company has power to give the assistance in its memorandum and articles; and

that directors do not act in a way that may breach any of their duties to the company. For example, if a transaction involves

a private company subsidiary guaranteeing the obligations of its parent company, the private company's directors will need

to consider whether there is a corporate or commercial benefit to their company in giving the guarantee - it is not enough

to show a benefit to the group as a whole.

Disclosures of directors' interests

The rules on disclosure of directors' interests in transactions changed on 1 October 2008 in two major areas:-

Disclosure of interests in transactions

The old Companies Act legislation has been repealed and replaced with a system where directors have to disclose an interest in

a proposed (or in some cases, an existing) transaction, either orally at the board meeting, by notice in writing or by general

notice. The disclosure needs to give details of the nature and extent of the director's interest.

Companies involved in acquisitions or disposals will need to update their board minutes to ensure compliance with the new


Directors' duty to avoid conflicts of interest

This new duty is a much more significant change. Directors now have a statutory duty to avoid conflicts of interest and if a

situation arises where there is a conflict or a potential conflict (a "situational conflict"), the directors must authorise the

conflict. The rules potentially have very wide scope – and could apply to any arrangements involving shares or other securities

(including share plans, transactions involving trusts and subscriptions for or transfers of shares).

For a private company incorporated after 1 October 2008, the directors can authorise the conflict unless the company's

articles contain anything to the contrary. However, for private companies incorporated before 1 October 2008, shareholder

approval is required for the directors to authorise conflicts (unless the articles say otherwise). In view of this it may be

appropriate to amend the company's articles to specifically cover this issue.

For a public company, only non conflicted directors can authorise the conflict, and then only if the articles specifically give

them the powers to do so. There will also still need to be sufficient non conflicted directors to form a quorum. In practice this

means that the company's articles may require amendments before the arrangement can proceed.

Reduction of capital by solvency statement

As of 1 October 2008, assuming the company's articles of association do not prohibit it, a private company may reduce its

capital provided there is a director's statement of solvency, without the need for court approval.This change should assist

companies in increasing distributable reserves, returning surplus capital to shareholders, distributing assets and buying back or

redeeming shares. Go Back

Expert Determination

It is common in corporate transactions for the parties to agree that an expert determination should be sought where, for

example, a valuation is needed or an opinion is needed on a technical matter. The expert determination provides a means of

settling the dispute (reasonably swiftly and cost effectively) and is therefore a useful alternative to the more costly routes of

litigation or arbitration. On a corporate acquisition it is common to see an expert determination clause in the sale and purchase

agreement in the context of agreeing completion accounts or in the tax deed in the context of determining whether there is an

overprovision in the accounts (or completion accounts).

The recent case of Owen Pell Limited and Bindi (London) Limited has confirmed that an expert's determination will be binding,

even if he has made errors in his conclusions, where:

the parties have agreed to be bound by the expert's decision;

the expert has complied with the instructions given and answered the question(s) asked; and

there is no evidence of bias in the expert's decision.

The Facts

Owen Pell Limited ("Owen Pell") entered into a contract with Bindi (London) Limited ("Bindi") under which Owen Pell agreed to

build an extension and undertake other work at Bindi's property. Owen Pell left the site before the work was finished and a

dispute arose as to Owen Pell's entitlement to payment under its final account. Bindi also complained of defects in Owen Pell's


The parties agreed to have their dispute determined by an independent expert, to be appointed by the Royal Institute of

Chartered Surveyors. The written agreement set out the following terms:-

the independent expert would be asked to determine:

- the value of Owen Pell's work and the sum due to Owen Pell pursuant to submission of its final account; alternatively

the amount to be deducted from sums owed to Owen Pell under the contract; and

- the entitlement (or otherwise) of Bindi to contra charge Owen Pell in respect of the work carried out on the project.

the parties would be bound by the decision of the independent expert and, following the decision, were not able to refer the

dispute to a subsequent tribunal, including adjudication under the 1996 Act.

The independent expert issued his decision in a detailed document and determined that Owen Pell was entitled to be paid

£53,487 plus VAT, but that Bindi should only pay 80% of his fees. Bindi refused to make payment - saying that it was an implied

term of the agreement that the decision of the expert would be of no effect and/or would be liable to be set aside in the event


the expert failed to conduct himself in accordance with the principles of natural justice; or

the expert conducted himself in such a way as either was biased or gave the appearance of bias; or

in conducting himself and/or reaching his conclusions, the expert was guilty of gross or obvious error and/or was perverse

in his conclusions.

Bindi contended that the expert was guilty of bias or partiality, both actual and perceived and acted in breach of the principles

of justice in a number of ways including: being dismissive of Bindi's complaints about Owen Pell and reaching a conclusion

without giving Bindi the opportunity to comment on it.

The Decision

The High Court found in favour of Owen Pell and granted Owen Pell's application for summary judgement to enforce the

expert's decision. The court held that:-

there was nothing in the agreement which suggested that this dispute and the approach to it was different from other

expert determinations and it was not suggested that the parties gave any consideration to the rights enshrined by virtue of

the Human Rights Act when they agreed to submit to expert determination;

there were benefits to the parties who chose the route of an independent expert – for example: a quick solution; the ability

for the parties to limit their exposure to costs; and finality. The wording of the agreement indicated that the parties

intended to be bound by it;

there was no reason to depart from the guidance given in a previous case (Bernhard Schulte) which confirmed that there is

no requirement for the rules of natural justice or due process to be followed in an expert determination in order for that

determination to be valid and binding between the parties;

there was no evidence of actual or apparent bias on behalf of the expert;

even if Bindi was able to demonstrate that the expert made gross and obvious errors and reached decisions that were

perverse, there is no authority to say that the decision should be considered to be a nullity or set aside. Provided that the

expert answered the right question (which he did here), the decision is binding even if wrong.


This decision confirms previous case law in this area that an expert's determination will be binding even if wrong (provided that

the expert has answered the right question put to him). If the parties do not want to be bound by an answer in such a case

then the agreement should expressly provide for this. For example, any decision in a sale agreement (or other ancillary

documents such as the tax deed) which is stated to be "final and binding" should also include the words "in the absence of

clear or manifest error". Alternatively the parties could agree a set of rules that the expert must follow in reaching his

conclusion. Go Back

Update on Demibourne

HMRC has published guidance (the "Guidance") on the practical effects of the Demibourne case and the legislation brought in

to address what was considered the harsh result of this case for employers when a worker treated as a self employed

consultant is later re-categorised as an employee (see our earlier article in the April edition


The new regulations allow HMRC to make a direction to transfer a PAYE liability from an employer to an employee, meaning

that the employer will not be liable for PAYE income tax which the employee has already paid under self-assessment. Such a

direction will not be used to impose any additional liability on the employee.

What is covered by the Guidance?

HMRC discretion - HMRC has discretion in deciding whether to make a direction. However, the guidance says that it will

only use its discretion to not make a direction in exceptional circumstances where there is strong evidence to suggest that

the employer has deliberately failed to operate PAYE (with no collusion from the employee) in the expectation that the

employer will benefit from the new legislation if discovered.

Worked examples include:

- Circumstances in which HMRC would or would not consider a direction. Examples are given where an employer has

wrongly treated a worker as a self employed consultant and he is later re-categorised as an employee, and whether a

direction would be made based on the facts and, in particular, the timings of events;

- Cases where the employee's self assessment relates to more than one contract. Provided there is sufficient income

self-assessed to cover the income from the employer concerned, HMRC will accept that the tax self-assessed

represents the tax on the re-categorised income (an apportionment calculation may be applied); and

- Situations where the employee has claimed deductions for expenses, reducing the self-assessed amount of tax.

VAT - where a worker had been registered for VAT, that registration becomes invalid on the worker's re-categorisation as an

employee. PAYE will be charged on VAT exclusive sums paid to the worker. The VAT account can be cleared by either a

refund to the employee, or a recovery from him, whichever is applicable. If the employer has been incorrectly recovering

VAT paid to the worker as input tax, HMRC may assess the employer for the over claimed input tax.

Penalties and Interest - a PAYE direction does not reduce the figure on which penalties are calculated. The employer may

remain liable to penalties on the full amount of tax which should have been deducted in accordance with the PAYE

Regulations. However, interest will only be charged on any balance of tax remaining payable by the employer after a

direction has been made.


When conducting due diligence for M&A transactions any consultancy agreements should be scrutinised to ensure that they

contain provisions which function in line with the new regulations and which (ideally) contain the circumstances in which

HMRC may make a direction under the regulations. However, this is no substitute for taking full indemnities in relation to

compliance with the PAYE Regulations by the target company. Go Back

Employment Status – The Importance of a Right of Substitution

A recent High Court case has confirmed the importance of unfettered rights of substitution where consultants or other

contractors are treated as self-employed. The decision shows that it is difficult in practice for arrangements relating to the

services of highly skilled workers to avoid characterisation as employment, as the end client is unlikely to accept an unfettered

right of substitution in that situation. The case also emphasises that even a limited degree of control over how a skilled worker

carries out the work will point towards employment.

The case in question, Dragonfly Consulting Limited v HMRC, concerned the application of the IR35 regime, but it also has wider

application to employment status more generally and will be relevant where consultants are directly engaged by the client

company. The IR35 Rules were introduced to prevent individuals avoiding income tax by providing their services through an

intermediary, most commonly a personal service company. IR35 allows HMRC to effectively 'look through' the legal

relationships between the parties and instead determine the tax treatment by considering whether, had the services been

provided under a contract made between the worker and client directly, the worker would have been regarded as employed by

the client for income tax and NICs purposes. If the worker would have been so regarded, income tax and NICs must be

deducted by the intermediary under the PAYE system.

In the Dragonfly case a highly skilled IT Systems Tester (Mr Bessell) was the sole worker for the personal service company

Dragonfly Consultancy Limited ("Dragonfly"), of which he owned half the shares and was the sole director. Dragonfly entered

into an agency agreement with DPP International Limited ("DPP") to provide the services of Mr Bessell to the AA. Mr Bessell

was engaged on a fixed term contract which, having been extended and renewed, resulted in his overall duration of engagement

being from April 2000 to February 2003. During this time he carried out the services personally and did not carry out any

significant work for any other person.

HMRC maintained that IR35 applied to the arrangement and that, had a hypothetical contract existed between Mr Bessell and

the AA, that contract would have been one of employment. The Special Commissioner agreed, so Dragonfly appealed to the

High Court on four grounds:-

1. Right of Substitution

Dragonfly argued that, if the hypothetical contract between Mr Bessell and the AA contained a right for Mr Bessell to send a

substitute, it could not, generally speaking, be one of employment.

To assess what the hypothetical contract between Mr Bessell and the AA would have looked like the High Court examined

the contract between the AA and DPP, the contract between DPP and Dragonfly and the factual reality of the arrangements

in general. The contract between DPP and Dragonfly contained various clauses meaning that Dragonfly could not provide

a substitute for Mr Bessell without the prior written consent of DPP. Further provisions also required that a substitute

consultant could not be deployed without Dragonfly having first satisfied DPP that the new consultant was trained and

suitable to undertake the services. The contract between DPP and the AA, however, contained only a promise that DPP

would use their best endeavours to supply staff competent to do the work; it did not prohibit substitution. Dragonfly

argued that because of this, it could not be said that substitution was impermissible.

The High Court, however, found that as a matter of fact, regardless of the precise contractual situation, the AA considered

itself as having engaged the services supplied by Mr Bessell and no one else, and that without the AA's consent a substitute

could not be provided. Rejecting the argument of Dragonfly, they held that in order to displace this finding the contract

between DPP and the AA would need to contain an express provision permitting substitution at the unfettered discretion of

DPP. Such a provision was not present and therefore the hypothetical contract between them and Mr Bessell was one of


2. The Question of Control

Dragonfly’s second ground for appeal was that there was insufficient control exercised by the AA for the relationship to

constitute employment.

It was common ground that control is an essential ingredient of a contract of employment. The High Court, however, noted

that this was not the sole determining factor and that the fundamental question was whether the person performing these

services was doing so on his own account. In this case, Mr Bessell's performance of his duties was subject to a degree of

supervision and quality control which went beyond merely directing when and where to work. There were also factors such

as regular appraisal and monitoring which, albeit that these were not referred to in the formal contracts, occurred in

practice and were not compatible with a self employed worker in business on his own account. In the case of a skilled

worker in particular, the Court noted that one would not expect to find control over how the work was done.

3. The Intention of the Parties

It was argued by Dragonfly that the fact that the intention between all the parties was that there should never be a

relationship of employment was relevant. Indeed, the contract between DPP and the AA contained a provision specifically

stating that nothing contained in the agreement was intended to create a contract of employment between AA and Mr

Bessell. However, the High Court held that the weight to be attached to the intention of the parties was minimal except in

borderline cases.


This case shows how difficult it can be, regardless of what the parties intend and what is documented, to be fully certain as to

the employment status of highly skilled consultants. It emphasises the importance of 'end clients' genuinely agreeing that a

substitute can be provided at the consultant's discretion and making provision for this in the relevant contract. Of course, care

also needs to be taken as regards the other indicators of employment – notably the question of control, as highlighted above.

We have particular expertise in this area and our employment and tax specialists have put together a "status toolkit" designed

to help companies review the risk profile within their businesses arising from the way in which they engage workers. If you

would like further information, please contact Lisa Stevenson (lisa.stevenson@pinsentmasons.com).

In addition, anyone acquiring a company should also be careful when conducting due diligence to review the employment

status of any consultants who regularly carry out work at the company. This applies however the consultant is engaged, but the

risk is of course particularly high where consultants are engaged directly. If there is any doubt, protection should be included in

the sale documentation to cover the potential tax and NICs exposure. Go Back

© Pinsent Masons LLP 2008

Should you have any questions please contact your usual Pinsent Masons adviser who will be able to assist you further.

This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.


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