Individual was employee despite contract for services and intermediary personal service company

Individual was employee despite contract for services and intermediary personal service company

Time to audit contractor arrangements in time for April 2020 tax rule changes

In Sprint Electric Ltd v Buyer’s Dream & Another the High Court held that an individual was an employee rather than an independent contractor. This conclusion was reached despite the fact that the individual provided services to the company under a contract for services and via an intermediary personal service company. Additionally, none of the parties had questioned the description of their relationship as that of contractor and client. Nevertheless, the High Court considered it necessary as a matter of policy to look beyond the description of the relationship that the parties had chosen to adopt.


Sprint Electric Limited (SEL) offered Dr Potamianos a senior post at the company.  He was required to work through a service company for tax avoidance reasons.  Dr Potamianos therefore formed Buyer’s Dream Limited (BDL) and over a number of years BDL entered into a series of contracts for services with SEL. Under one such contract (the Source Code Contract), Dr Potamianos created software and documents that were used by SEL.  In 2017 Dr Potamianos was removed from SEL and excluded from the company’s premises.  He took and retained an SEL computer from SEL’s premises on leaving the company, which led to the litigation.  SEL brought commercial proceedings in the High Court (the Court) in relation to a number of intellectual property disputes that arose between the parties. From an employment perspective, the interesting point in this case was the Court’s assessment of the employment status of Dr Potamianos.     


i. Employment status

In its judgment, the Court examined the law around the use of service companies in an employment context and looked at the tax advantages of this type of arrangement.  The Court made it clear that the existence of a service company is not in itself conclusive evidence that an individual is an independent contractor. The Court was driven to re-evaluate the type of contract in place between the parties because in the Court’s view the parties were clearly motivated by tax avoidance objectives when they entered into a number of key written agreements which were at the heart of the proceedings. The Court commented that such motivation was “impossible to ignore” and went on to say that where a court has concerns that parties have chosen to give their relationship a label that is untrue or inaccurate for reasons of tax avoidance, it can and should consider the issue of its own accord. 

The Court concluded that the parties had, in this case, given an inaccurate label to their relationship. It considered a number of factors including the fact that there was a clear expectation that Dr Potamianos would personally perform the relevant services for SEL and the existence of detailed restrictive covenants. Bringing all the factors considered together, and in light of its policy reasoning for making the assessment, the Court concluded that the true relationship between SEL and Dr Potamianos was that of employer and employee.

It is worth noting that the Court’s decision in this case was in relation to Dr Potamianos’ employment status rather than the tax position of the arrangement. The IR35 legislation already tackles the use of intermediaries to avoid income tax and NICs. When IR35 applies, the sums received by the intermediary are treated as employment payments by the intermediary to the worker for tax and NICs purposes and will therefore be subject to PAYE.

ii. Ownership of copyright under the Source Code Contract

The decision that the relevant relationship between SEL and Dr Potamianos was that of employer/ employee provided clarity for the Court when seeking to establish the owner of the copyright in the software and documents created by Dr Potamianos under the Source Code Contract. Under section 11(2) of the Copyright, Designs and Patents Act 1988, where a work is made by an employee in the course of their employment, the employer will be the first owner of copyright in the work, subject to any agreement to the contrary. On this basis, and as there was no agreement to the contrary, SEL’s claim in relation to the Source Code Contract succeeded and the Court held that SEL owned the copyright in the relevant software and documents. 


The decision reached is a surprising one from an employment perspective as it indicates that the use of a service company is vulnerable to challenge not only under IR35 for tax purposes, but also for the purposes of employment status, even in circumstances where neither of the parties involved wish to contest the arrangement.

From an IP perspective, the end result of this case was relatively uncontroversial, given the established principle that copyright in a work created by an employee in the course of their employment belongs to their employer. Nevertheless, the Court’s decision that the relationship between SEL and Dr Potamianos was one of employee and employer clearly provided an elegant resolution to both the policy concern of tax avoidance and the issue of IP ownership.  As such, the Court appears to have gone further than normal, and it is likely that if these key elements of the case had not been present, we would have seen a different outcome.

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