Neutral Citation Number: [2011] EWHC 14 (Admin)
Case No: CO/3335/2010
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 14 January 2011 

Before:

MR JUSTICE KEITH
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Between:

	The Construction Industry Training Board 	Appellant	
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	Beacon Roofing Limited	Respondent	

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Mr Patrick Green and Ms Elizabeth Humphreys (instructed by James Byrne) for the Appellant
Mr Jolyon Maugham (instructed by Michael Welch & Co) for the Respondent

Hearing date: 17 November 2010
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Judgment

Mr Justice Keith: 

Introduction
1.	The appellant, the Construction Industry Training Board (“the Board”), has a snappy new name.   It now calls itself CITB-ConstructionSkills.   It 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 respondent, Beacon Roofing Ltd (“Beacon”), over the years.   However, in 2007 Beacon changed the way it engaged some of its workforce, and it 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.   
The material facts
2.	The relevant facts are not in dispute.   Beacon is a roofing contractor.   It employs two contract managers and office staff, but its roofing operatives (as tilers – perhaps a little pretentiously – are now called) have always been self-employed because of the fluctuating nature of the business.   The fact that Beacon’s roofing operatives have been self-employed meant that the Construction Industry Scheme (“the Scheme”) governed how 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 risk of a dispute with the Revenue over the status of its roofing operatives.   That led Beacon to enlist the services of Hudson Contract Services Ltd (“Hudson”).   
3.	Beacon’s contract with Hudson in respect of those services is dated 21 February 2007.   The contract did not alter the way Beacon recruited its roofing operatives or the levels of pay which its operatives received or the work which its operatives 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.   The way it worked was that Beacon would get every operative who it wanted its arrangements with Hudson to apply to (which in fact were all its operatives) to sign an agreement with Hudson on Hudson’s standard terms under which the operative 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, though 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 additional sum which Beacon had to pay to Hudson for assuming the responsibilities involved in engaging the operatives was £15.00 per operative per week plus VAT.   
4.	Within six weeks of Beacon entering this contract with Hudson, 28 of the operatives previously engaged by Beacon had signed agreements with Hudson, and their services were supplied by Hudson to Beacon.   By January 2010, Hudson had engaged 95 operatives whose services were supplied to Beacon under the contract.   
5.	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 payroll, presumably its managers and administrative 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.   
6.	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:
“… if the appellant satisfies the tribunal that [it] ought not to have been assessed to the levy or ought to have been assessed in a smaller amount, the tribunal shall rescind or, as the case may be, reduce the assessment but … in any other case shall confirm it.”
Beacon contended that it was not liable to pay a levy at all for those operatives whose services had been provided to it by Hudson.   Alternatively, it argued that if it was liable to pay a levy for those operatives, the levy should have been calculated at the rate of 0.5%, not 1.5%, though that contention was not pursued at the hearing of the appeal.   An employment tribunal sitting at London South held that Beacon was not liable to pay a levy at all for those operatives and allowed Beacon’s appeal.   The Board now appeals to the High Court pursuant to section 11(1) of the Tribunals and Inquiries Act 1992.   The appeal lies on a point of law only.   
7.	A lot of money turns on the outcome of the appeal.   That is because the Board does not – at present at least – regard Hudson as liable for the levy if Beacon is not.   Accordingly, if Beacon is not liable for the levy in respect of these operatives, no levy is payable for these operatives at all.   I was told that there are 42 other cases – all involving employers in the construction industry who have entered into similar contracts with Hudson and who were issued with levy assessment notices like Beacon was – awaiting the outcome of this appeal.   If the appeal is dismissed, other employers in the construction industry may be persuaded to contract with Hudson with a view to reorganising the way they engage their workforce.   The appeal is therefore of real interest to Hudson (which may explain why it funded Beacon’s appeal to the tribunal and why, as I was told, it is financing Beacon’s opposition to this appeal), and it is of real concern to the Board because revenue which is raised from the levy (which I was told was in the region of £90m a year) may be put at risk.   I have therefore approached the appeal with a keen sense of its importance.   
The statutory framework
8.	The Board is one of a number of industrial training boards established by the Secretary of State under section 1(1) of the Act “[f]or 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.   It 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 amount of levy to be assessed in respect of each construction establishment is … an amount equal to 1.5% of all payments (excluding payments in respect of the provision of materials and any other payments which are not in respect of the provision of services) made to persons during the relevant base period under labour-only agreements in respect of work carried out at or from the establishment …”
There is a dispute (which it is not necessary for me to resolve) about whether the base period to which the relevant levy assessment notice related was for the 2007-2008 financial year or the 2008-2009 financial year.   What is important is that a “labour-only agreement” is defined in Art 2(1)(h) of the 2009 Order as meaning 
“… any agreement or arrangement (other than contracts of service or contracts of apprenticeship) between an employer and any other person, the purpose of which is wholly or mainly the provision of services (not including professional services) of such a person or any other person to the employer in his trade or business”.
9.	At first blush, the relevant agreements in this case might have been the agreements between Hudson and the operatives, those agreements being neither contracts of service (because the operatives were not employees) or contracts of apprenticeship (because the operatives were not apprentices either).   In that case, the issue would have been whether the purpose of those agreements was wholly or mainly the provision of roofing services by the employees to Hudson.   The answer to that question would have been plain.   The agreements would not have been labour-only agreements because the roofing services under those agreements were to be provided to Beacon, not Hudson.   But it is plain that the agreements between Hudson and the operatives could not have been the relevant agreements because it was Beacon on whom the levy was imposed, and the levy could only be imposed on “employers in the construction industry”: see Art 3 of the 2009 Order.   Thus, if Beacon was the “employer” for the purpose of the definition of “labour-only agreement”, the relevant agreement in this case was the contract between Beacon and Hudson.   That was the way in which the tribunal was invited by both Beacon and the Board to approach the case, and the issue for the tribunal was therefore whether the purpose of that contract was wholly or mainly the provision of the services (not including professional services) of the operatives (since they amount to “any other person”) to Beacon.   It was common ground in the tribunal that if that had been the purpose of the contract between Beacon and Hudson, the levy had been correctly imposed on Beacon.   
The reasoning of the tribunal
10.	The tribunal correctly acknowledged that services, i.e. the labour of the operatives, were provided by Hudson to Beacon under the contract, but in the last sentence of para 24 of its judgment, the tribunal equated the purpose of the contract between Beacon and Hudson with 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 (after correcting typographical and grammatical errors):
“25.   The Tribunal is satisfied that [Beacon] did not enter into the Contract because it wanted Hudson to supply the services of the workers.   [Beacon] still sourced its own labour even after the contract was entered into.   All that has happened is that Hudson has been interposed between [Beacon] and its workers for administrative reasons.   Without the benefits such as administration of payroll, revenue queries etc as set out above, it is clear that [Beacon] would have continued to engage the workers directly rather than pay an extra £15 per week.   There is no evidence that (and [Beacon] does not appear to contend that) the contract between [Beacon] and Hudson in any way promotes, facilitates or assists in the provision of services of the workers to Beacon.   
26.   The Tribunal finds that the reason or purpose that the contract was entered into by [Beacon] with Hudson, was not for the provision of services but was for the other aspects of the contract such as administration of payroll etc as set out above.   The Tribunal asked itself first whether the reason for the contract between [Beacon] and Hudson was so that [Hudson] could source labour.   The answer was no.   [Beacon] still sourced its own labour.   The Tribunal then asked itself what the contract between [Beacon] and Hudson offered in addition to the labour element.   The Tribunal finds that it offered a substantial package of services as set out above.   Finally the Tribunal asked itself whether it was those services that [Beacon] was paying for, or the provision of labour.   The answer is the additional services.   The labour element was incidental … [it was] the effect of the contract between the parties.”
In other words, the Tribunal found that Beacon had entered the contract with Hudson so that it would be relieved of the administrative and clerical work involved in complying with the requirements of the Scheme, and since that had been the reason why Beacon had entered the contract with Hudson, that had been the main purpose of the contract.   
11.	Mr Patrick Green for the Board questioned whether the tribunal had ever found that Hudson had provided the services of the operatives to Beacon.   He pointed to the last sentence in para 25, as well as the emphasis which the tribunal placed earlier in para 25 on Beacon still sourcing its own labour.   I do not share that scepticism.   Although I think that the tribunal might have expressed itself better, I am sure that in those passages the tribunal was saying that the fact that Beacon selected its own workforce without any help from Hudson pointed away from the provision of the services of the operatives being the main purpose of the contract.   I do not think that the tribunal was saying that Hudson did not provide the services of the operatives to Beacon at all.   That would have been inconsistent with the tribunal’s findings in para 10 of its judgment (that the services which Hudson provided “involves Hudson taking on the workers that its clients require to carry out their construction activities and then supplying the services of those workers to the client”) and para. 11 of its judgment (“the same individuals that [Beacon] would have previously taken on directly were directed to and taken on by Hudson, who in turn provided the individuals to [Beacon]”).   (Emphasis supplied)
The purpose of the agreement
12.	In my opinion, the flaw in the tribunal’s approach was its assumption that the reason why Beacon entered the contract with Hudson has to have been the purpose of the contract.   It takes at least two parties to make a contract, and to the extent that it was appropriate for the tribunal to consider why Beacon entered the contract, the tribunal should have considered why Hudson entered the contract as well.   The tribunal did not do that.   But much more fundamentally, the reason why a party enters a contract is not necessarily the purpose of the contract.   Mr Green gave some examples of that.   Take a borrower who chooses to take out a mortgage with bank A rather than bank B, because bank A offers new borrowers the chance of winning a holiday whereas bank B does not.   The reason why the borrower took the mortgage with bank A rather than bank B was the chance of winning a holiday, but the purpose of the mortgage was to enable the borrower to borrow money.   Again, take an employer who chooses to take out a policy of private health insurance for its staff from company C rather than company D, because company C offers the staff a confidential helpline if they are suffering from work-related stress whereas company D does not.   The reason why the employer took out the policy with company C rather than with company D was to get its staff the additional benefit, but the purpose of the policy was to provide health cover for its staff.   
13.	These examples are not entirely apposite to the present case.   The examples illustrate the reasons why the borrower took a mortgage with bank A rather than bank B, and why the employer took out the policy with company C rather than company D, and those reasons were plainly very different from what the purpose of the mortgage and the policy was.   The distinction between the reason why Beacon contracted with Hudson and what the purpose of the contract between Beacon and Hudson was is obviously nothing like as clear cut.   
14.	The existence of a distinction between the reason for entering a contract and the purpose of the contract does not mean that the parties’ subjective intentions have no part to play in ascertaining the purpose of the contract.   At one stage, Beacon was arguing that since the parties’ subjective intentions are irrelevant when it comes to ascertaining the meaning of a contract (see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896), their subjective intentions are just as irrelevant when it comes to ascertaining the purpose of the contract.   I do not think that this follows.   Ascertaining the meaning of a contract is so different an exercise from ascertaining its purpose that the embargo on treating the parties’ subjective intentions as a tool for construing a contract does not necessarily apply when it is the contract’s purpose which the court is seeking to identify.   
15.	I do not doubt that the parties’ subjective intentions should be taken into account when determining the purpose of a contract.   Indeed, when it comes to ascertaining the main object of a transaction for the purposes of section 28(1) of the Finance Act 1960, the House of Lords held in Inland Revenue Commissioners v Brebner [1967] 2 AC 18 that the subjective intention of the taxpayer was critical.   But in seeking to ascertain whether the purpose of an agreement was wholly or mainly the provision of services within the meaning of Art 2(1)(h) of the 2009 Order, it is inappropriate just to ask why the parties entered the agreement.   It is necessary to ask what they wanted the agreement to achieve, and how they were going to achieve it.   That involves looking at the terms of the agreement as a whole, and in not giving undue weight to particular features of the agreement, for example, that Beacon was getting the services of its operatives for only an additional £15.00 per operative per week.   
16.	In some cases, it may be difficult to identify what the purpose of the contract may be, but for my part I do not think that it is in any way problematic in this case.   In the light of the tribunal’s findings of fact, it is plain that what motivated Beacon and Hudson to enter the contract was Beacon’s desire to be 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 its operatives) and Hudson’s willingness to assume those responsibilities for a fee.   But those objectives could only be achieved by Beacon divesting itself of its workforce.   Since Beacon needed operatives to fulfil the contracts which Beacon entered into with its clients, Beacon had to buy in the services of the operatives.   It is, of course, perfectly true, as Mr Jolyon Maugham for Beacon emphasised, that Beacon continued to have the same operatives doing the same work after the contract as before, but that does not affect the point that Beacon’s subjective intention in entering the contract with Hudson was to obtain the services of its operatives without having to engage them directly, and Hudson’s subjective intention in entering the contract with Beacon was to provide the services of those operatives at no cost to itself but for a fee to reflect the ancillary services it was providing to Beacon.   On any view, therefore, the main purpose of the contract was to enable Hudson to provide the services of those operatives to Beacon.   The fact that the fee was enhanced by £15.00 per operative per week to reflect Hudson’s responsibility for complying with the requirements of the Scheme and for the assumption of the risk of an adverse finding about the employment status of the operatives does not affect the fact that the main purpose of the contract was the provision of those services.   
17.	The tribunal downplayed all of this by saying that Beacon continued to source its own labour after the contract with Hudson was entered into, and that “[a]ll that has happened is that Hudson has been interposed between [Beacon] and its workers for administrative reasons”.   It is, of course, true that Beacon continued to source its own labour in the sense that it chose which operatives should sign agreements with Hudson for the supply of their services to Beacon.   It is also true that Beacon’s arrangements with Hudson were set up for the “administrative reasons” to which the tribunal referred.   But for the tribunal to say that Hudson had simply been interposed between Beacon and its workers suggested that in truth Beacon continued to employ its workforce albeit through Hudson as an intermediary.   Nothing could be further from the truth.   Although Beacon still decided which operatives would carry out work for Beacon’s clients, the fact is that the operatives were now engaged by Hudson, and their services (as the tribunal also recognised) were provided to Beacon by Hudson.   Indeed, that is what Hudson itself successfully argued in Hudson Contract Services Ltd v Her Majesty’s Customs & Revenue [2007] STC 1363.   The issue was whether Hudson’s business “consisted of or included the furnishing or arranging for the furnishing of labour in carrying out construction operations” for the purposes of section 562(2) of the Income and Corporation Taxes Act 1988.   Pumfrey J held that it did.   I acknowledge, of course, that the fact that the arrangements which Hudson makes with its clients such as Beacon amount to the provision of services to them does not necessarily mean that the provision of those services is the purpose of those arrangements, but it is fair to say that it is at least not inconsistent with the conclusion I have reached.   
18.	It has been said on Beacon’s behalf that Beacon would hardly have continued to pay the sums due under its contract with Hudson if it was not being provided with the services of the operatives.   That is true, but it begs the question whether the provision of those services was the purpose of the contract.   However, the fact is that, if the purpose of the contract was to relieve Beacon of the administrative and clerical work involved in complying with the requirements of the Scheme (and of the risk of an adverse finding about the employment status of its operatives), it is significant that it was paying only £15.00 per operative per week for those benefits, whereas the sums which it actually paid to Hudson amounted to 30 times that amount.   That highlights the flaw in the tribunal’s reasoning in the last three sentences in para 26 of its judgment.   The tribunal posed the question: what was Beacon paying for?   The ancillary services or the provision of labour?   In saying that Beacon was paying for the ancillary services, i.e. £15.00 per operative per week, the tribunal completely ignored the much larger sums which Beacon was paying to Hudson for the services of the operatives.   
Conclusion
19.	For these reasons, I have concluded that the only conclusion open to the tribunal on the primary facts which it found 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.   It follows that this appeal must be allowed, and the levy assessment notice which the Board issued to Beacon on 20 April 2009 must be reinstated.   I wish to spare the parties the trouble and expense of attending court when this judgment is handed down, and at present, I see no reason why Beacon should not pay the Board’s costs of the appeal, to be the subject of a detailed assessment if not agreed.   If Beacon wishes me to make some other order for costs, its solicitors should notify my clerk of that within 14 days of the handing down of this judgment, and I will make such order for costs as I think is appropriate without a hearing on the basis of such written representations as are made.   If Beacon wishes to apply for permission to appeal, it must make that application to the Court of Appeal, since the Board’s appeal was a second appeal.