WHAT AN ODD DECISION!

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Occasionally I come across a tax case where the decision seems so outrageous that I wonder what the Tribunal forgot to mention.  The FTT decision in Petrol Services Ltd (TC 06907) is one such case.

Petrol Services owns two filling stations.  It created a way to run them with no staff.  The key to its profitability was to fix the price to be charged for petrol each day.  It also needed to constantly check that there were no problems with the filling station.  It entered into agreements with J & J Enterprises (Leicester) Ltd and Jodepine Ltd for those companies to provide consultancy services in return for a monthly fee.

Petrol Services Ltd was owned jointly by Mr Odedra and Mr Badiani who were the sole directors of the company.  J & J Enterprises (Leicester) Ltd provided its services through the work of Mr Odedra and Jodepine Ltd did so through the work of Mr Badiani.

I suspect most readers by now are thinking IR35.  I certainly was.  But that was not HMRC’s approach.  In reliance on the Supreme Court decision in RFC 2012 plc (the former Glasgow Rangers company) they said:

1.      The payments achieved the work of Mr Odedra and Mr Badiani.

2.      Mr Odedra and Mr Badiani are directors of Petrol Services Ltd.

3.      Their contract of service as directors trumps all other contracts (actually they had no such contracts, so this probably means deemed contracts).

4.      Accordingly the payments to the two companies were for the services of Mr Odedra and Mr Badiani.

5.      Ergo, PAYE and NIC are due on the payments.

I suspect that most readers could pick a lot of holes in that analysis.  Unfortunately the Tribunal endorsed it.

Some readers might think this a fair result.  Surely directors should not be able to avoid tax by interposing a company?  But that is why we have IR35.  Parliament did not think they should be able to do so.  They resolved this by imposing a tax charge on the intermediary service company.

So is IR35 irrelevant?  Can it never apply because HMRC can ignore the company and create a deemed contract between the “employer” and the worker, so that the payment under that deemed contract is made to the company at the deemed direction of the worker in satisfaction of the deemed salary due to him under his deemed employment.  Apparently so, in the view of the Tribunal.

What seems to have gone wrong is the wording of the consultancy agreements.  These are not reproduced in the FTT decision but it seems possible that Mr Odedra and Mr Badiani were parties to the agreement.  Certainly the consultancy agreements themselves defines “the consultant” as “J & J Enterprises (Leicester) Ltd/or B. Odedra in one case and Jodepine Ltd/Mr N Badiani” in the other.

It was probably this that enabled the Tribunal to go beyond saying that a deemed contract between Petrol Services Ltd and each of the individuals would have been an employment contract.

The Tribunal acknowledged that, “We fully accept that it is legally possible for an individual to have his own independent business… while also having the office of director of the company, and that in such a case the person’s professional fees are not earnings from his office as director”.  However its members’ experience was that “this does not normally occur where the individual is a competitor of, or in the same line of business, as the company as appears to have been the case here”.  That latter statement is factually wrong.  The business of Petrol Services Ltd was to operate a service station; that of the two companies was to provide advice on pricing and administrative services.  Those are clearly not the same line of business.

It appears that this flawed reasoning led them to conclude that Mr Odedra and Mr Badiani did not have independent businesses.  However, they never claimed to do so; they claimed that J & J Enterprises Ltd and Jodepine Ltd has independent businesses, which they seem to me to in fact have had.

The Tribunal’s conclusion was that, “When viewed realistically, as no services were provided by the Consultants other than those provided by the directors of the Appellants, the payments should be regarded as having been an award for the services as director of the Appellant”.  The problem here is that no services were provided “as directors of the Appellants”; the services were provided as directors of J & J Enterprises Ltd and Jodepine Ltd respectively.  Of course Mr Odedra and Mr Badiani could have provided the same services as directors of Petrol Services Ltd had they wished to do so.  But tax is generally based on what happened, not what could have happened if the parties had opted to adopt a different structure.  That is why this decision is so worrying.

ROBERT MAAS