The Construction Industry Training Board (aka CITB-Construction Skills) v Beacon Roofing Ltd

The respondent to this appeal, which I shall call “the Board”, provides training for those working in the construction industry. In order to fund the provision of that training, it imposes a levy on employers in the industry. It has imposed such a levy on the appellant, Beacon Roofing Ltd ("Beacon"), over a number of years. However, in 2007 Beacon changed the way it engaged some of its workforce, and it then challenged the levy which the Board subsequently imposed. The question which this appeal raises is whether Beacon is still liable for the levy in respect of those members of its workforce or whether, as the employment tribunal has held, the change has resulted in Beacon no longer being liable for the levy.

These can be elicited from the decision of the employment tribunal. Beacon is a roofing contractor. It employs two contract managers and some office staff, but its roofing operatives (as tilers are now apparently called) have always been self-employed sub-contractors. The fact that Beacon's roofing operatives have been self-employed meant that the Construction Industry Scheme ("the Scheme") governed the manner in which Beacon paid them. Although tax continued to be deducted at source, it was deducted at a flat rate of 20%, and there were more generous allowances for expenses than under the PAYE scheme. However, complying with the requirements of the Scheme involved a considerable amount of paperwork, the maintenance of records and the remission of tax and National Insurance contributions to the Revenue, and there was also the ever present risk of a dispute with the Revenue over the status of its roofing operatives. These factors led Beacon to enlist the services of Hudson Contract Services Ltd ("Hudson").

Beacon's contract with Hudson in respect of those services is dated 21 February 2007. Within six weeks after entering into the contract with Hudson about 28 workers previously engaged directly by the appellant signed contracts with Hudson and their services were supplied by Hudson to Beacon. Since then, Hudson has engaged 95 workers and provided their services to the appellant under the contract.

The contract did not alter the way Beacon recruited its roofing operatives nor the levels of pay which its operatives received nor the work which they did: Beacon continued to recruit its operatives itself, to agree with them the terms on which they were to be engaged and to assign them their work. What the contract did was to enable Hudson to engage Beacon's operatives (thereby making Hudson responsible for complying with the requirements of the Scheme) and to provide the services of the operatives to Beacon (see para 10 of the Employment Tribunal’s decision). The way it worked was that Beacon would induce its operatives to sign an agreement with Hudson on Hudson's standard terms under which the operatives would be engaged by Hudson to supply their labour to Beacon. Those operatives would be paid by Hudson what they would have been paid by Beacon had they been engaged by Beacon following their recruitment. Beacon would reimburse Hudson for those payments, but, since Hudson was not to be treated as providing credit to Beacon, Hudson would only pay the operatives if Beacon provided the appropriate funds to Hudson "on the same day and at the same instant" as Hudson paid each operative. In this way, Beacon was relieved of the administrative and clerical work involved in complying with the requirements of the Scheme, as well as the risk of an adverse finding about the employment status of the operatives, though Beacon retained responsibility for insuring the operatives which Hudson engaged, and for complying with health and safety legislation. The amount which Beacon had to pay to Hudson for assuming the responsibilities was £15.00 per operative per week plus VAT, in addition to the amounts reimbursed to Hudson in respect of the payment made to each operative.

The contract made between Hudson and Beacon contained a note on the front page stating:-

On 20 April 2009, the Board issued the relevant levy assessment notice to Beacon. The notice required Beacon to pay a levy of £18,446.00 by 20 May 2009. Part of the levy – £3,235.00 – was 0.5% of the sums paid to employees on its own payroll, presumably its managers and office staff. The rest of the levy – £15,211.00 – was 1.5% of the sums paid to Beacon's "self-employed workers or sub-contractors for labour only", i.e. its roofing operatives.

Beacon appealed against the latter element of the assessment to an employment tribunal pursuant to section 12(4) of the Industrial Training Act 1982 ("the Act"). The burden of proving that it was not liable for that part of the levy was on Beacon because section 12(5)(a) of the Act provided, so far as is material:

The Board is one of a number of industrial training boards established by the Secretary of State under section 1(1) of the Act "for the purpose of making better provision for the training of persons over compulsory school age … for employment in any activities of industry or commerce". The Board's power to impose levies is derived from a levy order made by the Secretary of State pursuant to sections 11(1) and 11(2) of the Act. The levy assessment notice to which this appeal relates was issued pursuant to a levy order made by the Secretary of State on 3 March 2009. That order was the Industrial Training Levy (Construction Industry Training Board) Order 2009 ("the 2009 Order"). It required "employers in the construction industry" to pay various levies based on a percentage of the total payments they had made to their workforce. Whether Beacon had to pay a levy in respect of those of its operatives whose services had been supplied to it by Hudson turned on the proper interpretation of the phrase "labour-only agreements" which appears in Art 8(1) of the 2009 Order. Art 8 is headed "Assessment of amount of levy", and Art 8(1)B provides, so far as is material:-

The tribunal acknowledged that services, i.e. the labour of the operatives, were provided by Hudson to Beacon under the contract, and in the last sentence of para 24 of its determination, equated the purpose of the contract between Beacon and Hudson with the reason why Beacon entered the contract. Its findings on why Beacon had entered the contract were set out in paras 25-26 of its judgment, which read as follows:-

Keith J held that the tribunal had made an error of law because “the reason why a party enters into a contract is not necessarily the purpose of the contract”. That did not mean that the parties’ subjective intentions had no part to play in ascertaining the purpose of the contract but he held

Mr Jolyon Maugham for Beacon submitted:-

the purpose of a contract was synonymous with the intention of the parties in making the contract which was itself the reason why the parties made the contract. He relied on tax cases such as IRC v Brebner [1967] 2 AC 18 where the court was required to ascertain whether the main object (or one of the main objects) of a relevant transaction was to enable a tax advantage to be obtained. In ascertaining that object it was necessary to discover the taxpayer’s reason for entering the transaction;

the tribunal had found as a fact that the reason for or the purpose of entering the contract was not the provision of services but the other aspect of the contract namely taking over the administrative obligations which they had earlier set out;

to the extent (if at all) that the purpose of a contract was to be objectively ascertained, it still followed from the tribunal’s findings that the purpose of the contract was the provision by Hudson of the administrative know-how it had in relation to tax, National Insurance, etc and the taking over of the paperwork in relation to these matters.

Mr Patrick Green submitted:-

the purpose of a contract was an objective matter and could not be ascertained by discovering the reasons why parties had entered into a contract (let alone, as the tribunal appears to have decided in para 24 of their determination, the reason why Beacon alone had entered into the contract);

the findings of the tribunal in relation to the reasons why Beacon had entered into the contract were, therefore, irrelevant;

those findings obscured the real purpose of the contract which was, fundamentally, that Beacon were no longer themselves going to “employ” or themselves contract for the services of their operatives (if that was the right analysis of the previous arrangement) but instead were going to be provided by Hudson with the services of those operatives who would themselves be paid by Hudson, albeit with a re-imbursement of the same so paid together with a (comparatively small) sum for the services which Hudson provided.

As long ago as 1966, Lord Denning MR said that the system of “labour only” subcontracting had come under much discussion, see Emerald Construction v Lowthian [1966] 1 WLR 691, 697F. A labour only agreement, whether in general parlance or as defined in the 2009 order, is a legal genus of which labour only subcontracting is a species. It is well-known that such contracts have from time to time given rise to difficulties in the employment field (see Chitty, Contracts 30^th ed. Vol 2 para 39-028) but it would perhaps be surprising if the precise manner, in which companies in the construction industry secured the services of their operatives, should be critical in determining whether the levy contemplated by the 1982 Act should be applicable.

The difficulty with the tribunal’s analysis is that any bilateral contract is by definition made by two parties who may have entirely different (and indeed opposing) reasons for entering into the contract. It cannot, therefore, be right to equate the “purpose” of a contract with the reason or reasons why the parties entered into the contract in the first place, let alone (as the employment tribunal seems to have thought) the reasons why Beacon (as opposed to Hudson) entered into the contract. “Purpose” can, no doubt have the meaning of “reason” or “intent” if one looks at one person only (although the judgment of Romer LJ in Re Nicholson & Son’s Application [1931] 2 Ch. 157, shows that that is not necessarily always true); but the definition of the “purpose” of any bilateral arrangement cannot to my mind be determined by an inquiry into the parties’ subjective intentions, let alone the subjective intention of only one of them.

In a case such as the present, where there is no difficulty in determining the meaning of the contract, it is unnecessary to have regard to the recent plethora of case law on construction of contracts save to say that the meaning of any contract has to be ascertained against the relevant background. The relevant background is, no doubt, also important if it becomes necessary to ascertain the purpose of a contract. But the existence of that background will not necessarily govern the essential purpose of a contract. This is particularly important if part of the background is an earlier contract. The reason why a person makes a new contract is no doubt that it is in some ways dissatisfied with the old contract but the new contract may still have a main purpose which is different from the reason why the new contract was made.

It follows therefore that, in seeking to discover the reason why Beacon had entered the contract, the Tribunal asked itself the wrong question and thus erred in the law by departing from the statutory wording. The judge was therefore entitled (and bound) so to hold and, if appropriate, answer the right question; namely what was the sole or main purpose of the contract pursuant to which Beacon agreed to pay for Hudson’s services.

It seems to me that, if one stands back from the reasons why parties have made a contract and asks oneself what was the purpose of that contract, the inquiry must focus essentially on the terms of the contract and must, therefore, be an objective inquiry. The 2009 Order cannot contemplate that parties to a labour only agreement would give evidence about their state of mind when they made the contract and it must follow not merely that speculation about their reasons is inapposite but that the purpose of the contract must be ascertained primarily from its terms while taking into account any relevant background.

The relevant background in the present case is, as found by the tribunal, that there was a previous arrangement pursuant to which Beacon contracted directly with their roofing operatives, albeit supposedly as sub-contractors, but decided for a number of mainly administrative reasons that they wanted a different arrangement pursuant to which Hudson (rather than Beacon) would make contracts with the roofing operatives and provide what the Tribunal had earlier described (para 10) as Hudson’s service to companies in the construction industry which involved Hudson taking on the relevant workers

As far as the terms of the contract are concerned, it is true to say that Hudson’s obligation to provide Beacon with the operatives’ services is not over-emphasised but it is stated in terms in clause 15 and is necessarily implicit in both the initial “Note” and clause 1.

For these reasons I do not find any assistance in those tax cases where the court had to ascertain the object of a transaction particularly cases such as IRC v Brebner in which section 28 of the Finance Act 1960 applied to a person who obtained a tax advantage unless that person showed that

I therefore conclude that the main purpose of the contract between Beacon and Hudson is to be objectively determined by reference to the terms of the contract and the relevant background.

Once one asks oneself that objective question it seems to me that the main purpose of the contract was for Hudson to supply Beacon with the services of the roofing operatives who were going to perform the work which Beacon contracted with their customers to do. Without such operatives, Beacon could not begin to perform its contractual obligations to its customers which were the very reason for its existence as a construction company, as (indeed) their name indicates. They needed roofing operatives in order to perform the object for which they were incorporated. If they were not going to contract with them directly, they would have to contract for them to be supplied by some company such as Hudson. No doubt part of the attractiveness of the package offered by Hudson was Hudson’s willingness to deal with P.A.Y.E., National Insurance, etc and to provide a shield from any awkward inquiries from the revenue authorities. That may indeed be the reason why Beacon made the new arrangement with Hudson rather than continue themselves contracting with the operatives. But the main purpose of the contract was to make roofing operatives available to Beacon in order to enable Beacon to continue its roofing business. The rest was icing on the cake, or as the judge put it in para 18 of his judgment, “ancillary services”.

The tribunal called the package of administrative services “substantial” and then asked itself whether Beacon was paying for those services or the provision of labour. It answered that question by saying the payment was for “the additional services” and the labour element was incidental; but as the judge pointed out Beacon in fact paid much larger sums for the provision of the operatives (their full weekly earnings) than the £15.00 per operative for the ancillary services.

Since the tribunal asked itself the wrong question, the findings of fact made in answering that question cannot be decisive. The judge asked himself the right question and was able to answer it in the light of the primary findings of fact made by the tribunal and was able further to say (para 19) that it was the only conclusion open to the tribunal on the primary facts which it found; the answer which the judge gave was that the main purpose of the contract between Beacon and Hudson was the provision to Beacon of the services of the operatives which it had recruited. I agree that that was the only conclusion properly open to the tribunal and would dismiss this appeal.

The parties have now exchanged costs schedules; any objection to the respondents’ schedule should be the subject of written submissions before hand down.

I agree.

I also agree.