122: Service company arrangement set up for tax purposes was in reality an employment relationship

In Sprint Electric Ltd v Buyer’s Dream Ltd, a case concerning disputed intellectual property rights, the High Court has ruled that an individual who provided his services through a service company was in reality an employee.

In 1996, Dr Potamianos was recruited by Sprint Electric Ltd (SEL) to work as a programmer, writing source code and providing other technical services. In order to reduce tax liabilities for both parties, he formed a service company, Buyer’s Dream Ltd, which entered into a contract for services with SEL. Various other agreements were entered into subsequently which were also structured to avoid tax. In 2017 a dispute arose about the ownership of intellectual property which had been created by Dr Potamianos and supplied to SEL under the contract for services.

Neither party questioned the description of their relationship as set out in the contract for services. However, the High Court ruled that Dr Potamianos was an integral part of SEL’s organisation and the written contractual provisions either did not reflect the true position of the parties or were consistent with him being an employee. Rejecting Dr Potamianos’ argument that the Court should respect the contractual structures which the parties had chosen to adopt, it held that the true nature of the relationship between Dr Potamianos and SEL was one of employer and employee. This meant that the disputed intellectual property was created by Dr Potamianos in the course of his employment and belonged to SEL as his employer. The High Court also considered the general practice of using service companies in an employment context and expressed concern about the level of artificiality involved, noting that there is a clear public interest in not allowing parties to escape their tax liabilities by falsely describing their contractual relationship.

This case is a reminder that courts can look beyond contractual documents to ascertain the true legal relationship between the parties, even where this has not been questioned by the parties themselves. The High Court stressed that where a court believes that the labels chosen by the parties to apply to their relationship are untrue and are being used as a tax avoidance device, the court should consider this issue of its own motion.