Bilfinger Salamis UK Limited v The Commissioners for HMRC

It is, in our view, important to remind ourselves at the outset of three key principles in determining the short point of statutory construction before us.

The first is to remind ourselves of the modern approach to statutory interpretation. This has been set out by the Supreme Court in R (O) v Secretary of State for the Home Department [2022] UKSC 3. Of particular relevance to this case is what is said at [29] and [30] by Lord Hodge (in a judgment with which Lord Briggs, Lord Stephens and Lady Rose agreed):

“29.

[…] Words and passages in a statute derive their meaning from their context. A phrase or passage must be read in the context of the section as a whole and in the wider context of a relevant group of sections. Other provisions in a statute and the statute as a whole may provide the relevant context. They are the words which Parliament has chosen to enact as an expression of the purpose of the legislation and are therefore the primary source by which meaning is ascertained. […]

30.

External aids to interpretation therefore must play a secondary role. Explanatory notes, prepared under the authority of Parliament, may cast light on the meaning of particular statutory provisions. Other sources, such as Law Commission reports, reports of Royal Commissions and advisory committees, and Government White Papers may disclose the background to a statute and assist the court to identify not only the mischief which it addresses but also the purpose of the legislation, thereby assisting a purposive interpretation of a particular statutory provision. […] But none of these external aids displace the meanings conveyed by the words of a statute that, after consideration of that context, are clear and unambiguous and which do not produce absurdity.” 

The second is the Ramsay principle, which was stated at [9] in the Supreme Court’s decision in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16 “to have reached a state of well-settled maturity”. Of particular relevance to this case is what was said at [11] to [13] of the judgment:

“11.

The result of applying the purposive approach to fiscal legislation has often been to disregard transactions or elements of transactions which have no business purpose and have as their sole aim the avoidance of tax. This is not because of any principle that a transaction otherwise effective to achieve a tax advantage should be treated as ineffective to do so if it is undertaken for the purpose of tax avoidance. It is because it is not generally to be expected that Parliament intends to exempt from tax a transaction which has no purpose other than tax avoidance. [...]

12.

Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle. Although a statute must be applied to a state of affairs which exists, or to a transaction which occurs, at a particular point in time, the question whether the state of affairs or the transaction was part of a preconceived plan which included further steps may well be relevant to whether the state of affairs or transaction falls within the statutory description, construed in the light of its purpose. […]

13.

The decision of the House of Lords in the Barclays Mercantile case made it clear beyond dispute that the approach for which the Ramsay line of cases is authority is an application of general principles of statutory interpretation. Lord Nicholls of Birkenhead, delivering the joint opinion of the appellate committee (which also comprised Lord Steyn, Lord Hoffmann, Lord Hope of Craighead and Lord Walker of Gestingthorpe), identified the “essence” of the approach (at para 32) as being:

“to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.” […]”

The third principle concerns the proper approach to determining the meaning of a word used in a statutory provision. The law on this has been settled for over half a century but, in the context of this case, we consider that it is especially instructive to remind ourselves of the relevant legal test and the common errors to be avoided.

The seminal authority is the House of Lords decision Brutus v Cozens [1973] AC 854, a case which concerned the meaning of “insulting” in s. 5 of the Public Order Act 1936. Lord Reid said this at [C] and [D] on p.861:

“The meaning of an ordinary word of the English language is not a question of law. The proper construction of a statute is a question of law. If the context shows that a word is used in an unusual sense the Court will determine in other words what that unusual sense is. But here there is in my opinion no question of the word “insulting” being used in any unusual sense. It appears to me, for reasons which I shall give later, to be intended to have its ordinary meaning. It is for the tribunal which decides the case to consider, not as law but as fact, whether in the
whole circumstances the words of the statute do or do not as a matter of
ordinary usage of the English language cover or apply to the facts which have been proved.”

He continued at [G] on the same page in these terms:

“No doubt the Court could act as a dictionary. It could direct the tribunal
to take some word or phrase other than the word in the statute and consider
whether that word or phrase applied to or covered the facts proved. But
we have been warned time and again not to substitute other words for the
words of a statute. And there is very good reason for that. Few words
have exact synonyms. The overtones are almost always different.

Or the Court could frame a definition. But then again the tribunal would
be left with words to consider.”

He concluded at [A] on p.863 as follows:

“Parliament has given no indication that the word is to be given any
unusual meaning. Insulting means insulting and nothing else.”

Finally, we consider it helpful to consider the application of these three principles in the recent decision of the Court of Appeal in Altrad Services Ltd v HMRC [2024] EWCA Civ 720. The case concerned an avoidance scheme seeking to “refresh” capital allowances. In a judgment given by Sir Launcelot Henderson (with which Whipple LJ and Nugee LJ agreed) the following comments were made about the approach to the interpretation of the words used in the relevant statutory provisions, the overall purpose of those provisions and how the Ramsay principle should be applied to the facts of the case:

“82.

It is also material to observe that the phrase “ceases to own” is expressed in simple, non-technical language which should require no elaboration to unpack its meaning. Neither “ceases” nor “own” is defined, so each word should be given its ordinary and natural meaning; and, as we have seen, “own” is intended to be synonymous with “belongs to” in the predecessor legislation, which was a similarly non-technical and everyday expression.

83.

The question which must therefore be answered is whether, as a matter of ordinary language, and in a real and practical sense, the taxpayers ceased to own the assets which they sold to the Bank as step 1 in the scheme. In answering that question, it is elementary that the scheme must be regarded as a whole, and as it was intended to operate. […]

84.

[…]

85.

Adopting this holistic approach, and on the basis of the unchallenged facts found by the FTT, I have little hesitation in concluding that the taxpayers did not cease to own the relevant assets within the meaning of section 61(1)(a) when they were sold to the Bank. On the contrary, the whole purpose of the scheme was that the same assets would be returned to the sole beneficial ownership of the taxpayers upon exercise of the put option by the Bank three weeks later, and that for all practical purposes the taxpayers would continue to have the uninterrupted beneficial use of the assets for the purposes of their trade in the meantime. On the FTT's findings, the scheme was entirely tax-motivated and none of the steps in it had any real commercial purpose. […]”

We start with the context and purpose.

In interpreting the 1978 regulations, we must have regard to the statutory provision under which the regulations (and any amendment of the regulations) were made. The FTT found that none of the regulations made under s.7(2) of the 1992 Act were specifically made under paragraph (a) of that subsection. We observe that, in any event, the power to make the regulations is found in the whole of the provision contained in that subsection (so that it would have been an error if the regulations had cited only one or other of the paragraphs of s.7(2)). As a matter of ordinary language, paragraphs (a) and (b) of s.7(2) of the 1992 Act are, in effect, examples of specific cases which Parliament considered to be appropriate cases for fixing the liability as secondary contributor on a prescribed person: see the reference to “any other case” for which it appears to the Secretary of State that “such provision is needed”. The FTT considered that the broad purpose was to identify a secondary Class 1 contributor where there was ambiguity as to who the person was or arguably where there was no such contributor. We would not ourselves regard the provision as being confined to those cases. For example, para. (a) of s.7(2) is aimed at a rather different case (more than one person making payments in relation to an employed earner in respect of different employments).

Rather, it seems to us that, in enacting s.7(2) in the terms in which it did, Parliament’s purpose was to confer a wide discretion on the Secretary of State to provide “where it appears to the Secretary of State that such provision is needed” special provision identifying a person prescribed in the regulations as the secondary contributor. The cases in question where the power might be exercised are many and varied, and no attempt was made by Parliament to delineate them further.

We next consider the overall context provided by the 1978 regulations. Read as a whole, the 1978 regulations seem to contain – not unsurprisingly given the width of the power to make the regulations as described above – a miscellaneous collection of cases where a person described in the regulations is to be the secondary contributor in relation to the description of employment concerned.

However, it is relevant to consider the provision made by para. 2 of Sch.3 to the 1978 regulations, column (A) of which relevantly provides as follows:

“Employment, whether or not under a contract of service (not being employment described in paragraph 2 in column (B) of Schedule 1 to these regulations or an employment to which paragraph 1, 4, 5, 7 or 8 of this Schedule applies) in which the person employed renders, or is under an obligation to render, personal service and is subject to supervision, direction or control, or to the right of supervision, direction or control, as to the manner of the rendering of such service and where the person employed is supplied by or through some third person (including, in the case of a body of persons unincorporate, a body of which the person employed is a member) …”

The simple point to observe here is that the Secretary of State, in making appropriate provision in the regulations, was well able to make provision by reference to whether a person was subject to “supervision, direction or control” or “to the right of supervision, direction or control” as to the manner in which a person rendered “personal service”. It does not, of course, necessarily follow from this that, in inserting para. 9 into the same Schedule as para. 2, the Secretary of State rejected any concept of “supervision, direction or control” in the provision made by para. 9.

But, as Lord Hodge made clear in R (O), it is the language used by the law-maker (in this case, the Secretary of State rather than Parliament) that is the primary source from which the purpose of the legislation is to be inferred and it does seem to us to be – to put it at its lowest – surprising that, having referred to the “rendering” of “personal service” in both paras. 2 and 9 of Sch.3, the Secretary of State then chose different words in the form of “made available” to indicate that, as the FTT found and as the appellant submits, some level of “direction” was required. The question which naturally arises is why, if that was indeed the Secretary of State’s intention in inserting para. 9 into Sch.3 to the 1978 regulations, the Secretary of State chose not to refer in terms to “direction” (or “control”) and, indeed, not to go on and provide in terms what the necessary level of direction was.

The FTT referred to the Explanatory Note to the amending 1994 regulations as providing some background about the purpose and context. Paragraph [30] of R (O) makes it clear that Explanatory Notes to Bills may cast light on the meaning of particular statutory provisions, and other sources may disclose the background to a statute and help a court to identify the mischief it addresses and the purpose of the legislation.

The amending 1994 regulations are not, of course, provision made by Parliament but by the Secretary of State, so the dicta in R (O) need to be adapted to some extent. The regulations were made under the negative resolution procedure so that they had effect when made: it is possible for either House of Parliament to “pray” against the regulations (once made) but that possibility is exceptionally rare in practice. Unlike a Bill presented to Parliament by a Minister of the Crown where the legislation is considered and then enacted by Parliament and where the Explanatory Notes are prepared by a constitutionally separate body (namely, the department of the Minister sponsoring the Bill), a statutory instrument (such as the amending 1994 regulations) and the Explanatory Note (described, it should be noted, as not forming part of the regulations) are prepared by the same person in the same document.

One might think therefore that, on any view, provision made by the Explanatory Note to the regulations might be relevant to the interpretative exercise: after all, the explanatory comment is made by the actual law-maker at the same time as the regulations themselves are made.

In the particular case before us, we consider that the Explanatory Note said nothing about the mischief to which the new para. 9 of Sch. 3 to the 1978 regulations was addressed. Nor did it provide any further background. Rather, it was limited to a simple description of the effect of the new provision.

Moreover, as befitted a note that was intended to be explanatory, it described matters in a simple, non-technical way and was not unduly troubled by matters of technical accuracy. It referred to “employers in Great Britain” (which, although this is not stated in terms, must be a reference to the “host employer”) but was not concerned about the technical meaning attached to “in” Great Britain (namely, having a place of business in Great Britain) and nor was it concerned with the fact that the host employer would not actually be an “employer” of the person concerned. Beyond those matters, it referred, without more, to “workers seconded”. Again, “workers” was not the technically accurate description of the persons concerned, who would have been more accurately described as “employed earners”. The reference to the workers being “seconded” is all that we are left with.

The word “seconded” is not a term of art and, as was recognised by both the FTT and the appellant, is a somewhat amorphous expression of uncertain meaning. It no doubt helps to provide some kind of indication of a case at which the new para.9 of Sch.3 to the 1978 regulations was aimed but it seems to us to do little more than that. In particular, we do not think it can fairly or reasonably be read as providing an exhaustive definition of the cases intended to fall within the host employer provision. There is a real danger here in “over-analysing” what was intended to be a short, non-technical explanation of the provision, which, as we have noted, not unreasonably glossed over technical niceties. No doubt, it met that objective but it was not, and was not intended to be, a substitute for considering the words actually adopted in the host employer provision.

We can now turn to the host employer provision itself. The description contained in column (A) of para. 9 of Sch. 3 to the 1978 regulations amounts to the following short sentence (omitting the commencement and the paragraphing and, at least for this case, the irrelevant “mariners” exception):

“Employment by a foreign employer where in pursuance of that employment the personal service of the person employed is made available to a host employer; and the personal service is rendered for the purposes of the business of that host employer.”

It is no longer disputed by the appellant that the reference to “the personal service” of the person employed carries its case law meaning in determining whether or not a contract is a contract of service. That seems to us to follow from the fact that the personal service concerned is “in pursuance” of the employment of the person by a foreign employer and, bearing in mind the constituent elements of the test for determining a contract of employment, it would be surprising if this were anything other than a direct reference to one of those elements.

The provision then continues by saying that the personal service in question “is made available to a host employer” and that it must be “rendered for the purposes of the business” of that host employer. There is, in our view, nothing at all in the context (as we have described it above) to suggest that any of those words (“made available”, “rendered”, “for the purposes of the business”) are being used in an unusual sense. Those words – which we note are all simple, everyday words (although “rendered” is, perhaps, somewhat old-fashioned now) – are intended, therefore, to bear their ordinary meaning.

It is at this stage that we consider it pertinent to remind ourselves of the warning given in Cozens about the dangers of a court in seeking to define everyday words:

“No doubt the Court could act as a dictionary. It could direct the tribunal
to take some word or phrase other than the word in the statute and consider
whether that word or phrase applied to or covered the facts proved. But
we have been warned time and again not to substitute other words for the
words of a statute. And there is very good reason for that. Few words
have exact synonyms. The overtones are almost always different.

Or the Court could frame a definition. But then again the tribunal would
be left with words to consider.”

It seems to us that we were being invited to do just that by the appellant. In our view, and to adapt the conclusion of Lord Reid in Cozens, the Secretary of State in making the amending 1994 regulations inserting para. 9 into Sch. 3 to the 1978 regulations has given no indication that the words “made available” are to be given any unusual meaning: “made available” means made available and nothing else.

Understood in their ordinary, everyday meaning, those words do not, despite the submissions made by Mr Simpson, carry any connotation of “direction” in the manner submitted by him. Mr Simpson submitted that, if something is made available to someone to use, that “necessarily involves that that someone has power to decide how to use it (and indeed whether to use it at all)”. However, that seems to us to be nothing more than an assertion of the intended result of the appeal rather than an exposition of the ordinary meaning of the expression “made available”. As Mr Tolley noted in his oral submissions, it is perfectly normal English usage to talk of making something available to a person subject to particular terms or conditions. Nor can the requirement for some kind of direction be gleaned from the use of “rendered” in para. 9 of Sch. 3 to the 1978 regulations. The mere fact that the personal service is “made available” is not enough: the service also has actually to be “rendered” for the purposes of the business of the person to whom the personal service is being made available. That seems to us to be the self-evident purpose of that part of the host employer provision.

Mr Simpson also submitted that the host employer provision is “aimed at situations that approximate” a contract of employment. This was said to broadly correspond “to the (somewhat amorphous) idea of ‘secondment’.” We consider that at least some cases commonly regarded as constituting secondments will be covered by the host employer provision. We would not, however, be prepared to say more than that. Substituting proxies for the language used by the law-maker, particularly “amorphous” ones like “secondment”, is not the judicial task before us. The statutory question is not to be re-formulated into a question as to whether a case is one of secondment, whatever that expression might mean. That is even more the case in relation to the notion of “secondment-like-arrangements”, a word chosen by the FTT at [207] of its decision to describe the purpose of the host employer provision. As the House of Lords wisely noted in Cozens, embarking on an exercise like this would mean that “the tribunal would
be left with words to consider”: but they would be our words and not the words deliberately chosen by the law-maker.

Nor do we think that it helps at all to say (as Mr Simpson submitted) that the host employer provision was aimed at situations that “approximate” a contract of employment. There is nothing in the context or, more importantly, the language of the provision that bears that out. The intention, as we have noted above, of the 1978 regulations was simply to describe particular cases and then provide who was to be the secondary contributor in relation to those cases: nothing more and nothing less. In any event, the notion of an arrangement “approximating” to a contract of employment simply begs the question as to the level of approximation required. Again, that would be to substitute a different test from the one actually used by the Secretary of State in the amending 1994 regulations.

We consider that the real issue troubling the FTT in leading it to its conclusion that “some” level of direction was required was the notion that there must be some fact distinguishing cases to which the host employer provision applies from those involving contracts for services (referred to by the FTT (see [207] of its decision) and the appellant as “ordinary sub-contracting”). Mr Simpson submitted that such arrangements were not intended to be caught by the host employer provision as “otherwise, the application of the provision would be extended far beyond its proper scope”.

We are unable to accept that is the case. Indeed, we consider that this represents an inverse of the true position: the proper scope or intention of the host employer provision is to be inferred from the everyday language used in the provision.

What we suspect has caused the confusion in this case are the unusual arrangements devised by the appellant to meet Marathon’s desire to avoid bearing the economic cost of the secondary Class 1 contributions. As the FTT found, the scheme adopted was intended for no other purpose than to avoid a liability to secondary Class 1 NICs. For Marathon and the appellant, the world would, as a matter of substantive reality, continue as it did before the scheme was put into effect. The scheme adopted was not an ordinary secondment. Nor can it reasonably be regarded as an ordinary case of sub-contracting. In this connection, it needs to be recalled that the host employer provision was engaged only if the “personal service” of the person (in the employment law sense of the obligation of the employee to work “by one’s own hands” and not “by another”) was made available to another and that service was then “rendered for the purposes of the business” of that other. Both elements need to be satisfied.

As we do not consider that some level of direction is intended to lie with the host employer in the host employer provision, it is not necessary to address Mr Simpson’s further submissions about what that level might be. However, we would not want our decision to be read as suggesting that matters such as the direction that the host employer has in relation to any person will be irrelevant to the statutory question. In any given set of facts, such matters might indicate that the host employer provision is engaged. But that is, in our view, as far as it goes.

It is question of law for us to determine the meaning of the expressions “made available” and “rendered for the purposes of the business” in the host employer provision. In deciding that question, we need to determine whether those words are used in an unusual sense. In our view, there is nothing in the context suggesting that they are. Rather, they are common, everyday words and should be given their ordinary meaning. There is nothing in the ordinary meaning of those words that implies that the host employer must have some level of direction in relation to the rendering of the personal service. The presence or absence of direction in the host employer may be relevant as a factor to be considered in determining whether or not the “personal service” of a person is “made available” to another but it is not part of the statutory test.

We do not consider it helpful to substitute other words for those used in the legislation. While no doubt cases commonly regarded as secondments may fall within the host employer provision, whether or not they do so in any given fact pattern depends on whether the arrangements answer the actual statutory description by reference to the words used in the host employer provision.

There is, in our view, no difficulty in applying the host employer provision to sub-contracting arrangements. The scheme in this case was a long way from being a normal sub-contracting arrangement. The application of the host employer provision to a case such as this tells us little (if anything) about its application to more typical, commercial arrangements.

The case before us concerns an avoidance scheme with no purpose other than the purpose of avoiding secondary Class 1 NICs payable by the appellant. The scheme involved a number of different contracts intended to operate as a whole.

The simple questions for the FTT were whether, as a matter of ordinary language, and in a real and practical sense, the effect of the scheme “made available” the personal services of the employees to the appellant and whether those services were then “rendered” for the purposes of the appellant’s business. In answering those questions, the FTT was required to regard the scheme as a whole and as it was intended to operate. That was all that the FTT was required to do.

Accordingly, the FTT was wrong to hold that some degree of direction must necessarily lie with the host employer if the host employer provision was to apply, and, to that extent only, we consider that the FTT erred in law.

It follows from the above analysis that we accept HMRC’s primary case and that, consequently, we consider that the grounds of appeal are not made out.

As we have found an error of law in the FTT’s decision, we may (but need not) set aside its decision: see s.12(2)(a) of the Tribunals, Courts and Enforcement Act 2007. It is open to us to find that the FTT has made an error of law but reached the right result in any event: see, for example, the case of BTS v HMRC [2017] UKUT 159 at [67] and [68].

In Degorce v HMRC [2018] 4 WLR 79, the Court of Appeal (in a judgment given by Henderson LJ with which Thirlwall LJ and Longmore LJ agreed) held that the Upper Tribunal should decide whether to set aside a decision of the FTT by reference to the materiality of the error of law: the key issue is whether the error of law “might (not would) have made a difference” to the outcome. Henderson LJ explained the reasoning for this at [95]:

“I would accept the submission of Mr Gibbon that, if the Upper Tribunal finds an error of law to have been made, it then has a broad discretion whether or not to set aside the decision of the FTT. That is the clear import of the words “may (but need not) set aside”, and in my view it would be wrong in principle to interpret the scope of this discretion by reference to the previous law on tax appeals under TMA 1970. TCEA 2007 set up a new tribunal structure, and the provisions of section 12 apply to all chambers of the Upper Tribunal, not merely to the Tax & Chancery Chamber. That said, however, I consider that a test of materiality will still have a crucial, and usually decisive, role to play in the decision of the Upper Tribunal whether or not to set aside the decision of the FTT, and likewise in the decision of this court if an error of law by the Upper Tribunal is established. At least in cases of the present type, I find it difficult to envisage circumstances in which the Upper Tribunal could properly leave the decision of the FTT to stand, once it is satisfied that the error of law might (not would) have made a difference to that decision. As a taxpayer, Mr Degorce is entitled to be taxed according to the law, and if an error of law is detected in the FTT’s decision, which is material in the sense I have mentioned, justice will normally require nothing less than that the decision be set aside. Conversely, if an error of law is made, but the Upper Tribunal is satisfied that it was immaterial, there will be no injustice to Mr Degorce in allowing the decision of the FTT to stand.”

We do not consider that there is any realistic possibility that the FTT in this case might have reached a different conclusion if it had directed itself to the law as we have declared it to be. At [208] of its decision the FTT said in terms “that viewed realistically, “the personal service” of individuals was “made available” and “rendered” to Bilfinger UK for the purposes of Bilfinger UK’s business”. In reaching that view, it was, as a result of its findings at [74] to [78], applying a higher standard or, at any rate, a further test than we have found to be applicable, importing into the simple, everyday language of “made available” and “rendered” a requirement for some level of direction: see, for example, [207] of its decision where the FTT held that “something more” is required before a case falls within the host employer provision.

Accordingly, we consider that the FTT’s error of law was immaterial in the sense described in Degorce. The decision of the FTT as to the outcome (namely, that the host employer provision did apply throughout the relevant period with the result that the appellant was correctly assessed to secondary Class 1 NICs) stands.

For the reasons given above, the appeal is dismissed.