Caught by the “agency” legislation? Why typical non-agencies may still be liable 

A recent tax case shows that many organisations that do not consider themselves employment agencies, may still fall within the scope of agency legislation, and face significant tax issues in the future.  

For tax purposes, where the agency legislation applies, the worker is taxed as an employee under section 44 ITEPA 2003. 

The agency legislation applies whenever a third party/employment intermediary sits between the worker and the end client for the onward supply of their services.  

And the legislation doesn’t just apply to traditional recruitment agencies. Many other businesses can be caught too, even if they don’t see themselves as supplying labour. 

Businesses that engage self-employed individuals who provide services to clients (not via  

Personal Service Companies) should consider whether the agency legislation applies to them. 

When does the agency legislation apply? 

The agency legislation applies if: 

1. An individual personally provides services to another person (the client) and 

1. There is a contract between the client and the person other than the worker (the agency) and 

1. Under or inconsequence of that contract the services are provided, or the client pays for the services. 

There are certain exclusions that apply, for example where the individual is not subject to (or to the right of) supervision, direction or control (SDC) by any person. 

Tyler Security Limited v HMRC 

The agency legislation was recently considered at the First Tier Tribunal in the case of Tyler Security Limited v HMRC. 

In this case, the taxpayer supplied self-employed specialist dog handlers to its end clients for the purpose of providing security and search-dog detection services at events and venues. The issue to be decided was whether the agency legislation applied to the engagements. 

Prior to FTT, whilst dealing with HMRC, the taxpayer refused to accept the agency legislation applied to them and they engaged solicitors who advised them that, in their opinion, the taxpayer was not an agency but supplied dog detection services to its clients. 

At the FTT, the lawyers representing the taxpayer argued that the dog handlers do not fall within the agency legislation because, as a matter of fact, a subcontractor is not an individual or worker and that the subcontractor is making a composite supply of dog detection services which go beyond the supply of an individual worker and should not be categorised as personally provided service. Other representations were also made including that some handlers were VAT registered, were in business in their own account and that the services were excluded due to there being no right of SDC by any person.  

In contrast, amongst other reasons, the lawyers for HMRC argued that the agency legislation does not require an obligation on the individual’s part to provide services personally and it refers simply to the fact of whether the worker did personally provide services. They argued that all the requirements for the agency legislation to apply were met on the balance of probabilities.  

The FTT agreed with HMRC that all conditions of the agency legislation were met, confirming that the rules applied to Tyler Security. 

So, what should businesses consider? 

The agency legislation is complex and often affects businesses that don’t even realise it applies to them. Mistakes can be costly as HMRC would seek to recover PAYE, employer and employee NICs as well as penalties (can be up to 100%) and interest for the previous six tax years. 

Another related area that is commonly mistaken by businesses which are caught by the agency legislation is the payment of tax-free travel and subsistence expenses as places of work which could otherwise be considered as temporary are mainly considered to be permanent workplaces.  

There are many complexities businesses must consider, including having to determine employment status, whether the Construction Industry Scheme applies, whether the off-payroll workers rules (IR35) apply (and which entity is the end client as it impacts whether the rules have to be applied). With many different requirements, it is no wonder why businesses can inadvertently become non-compliant and face costly and lengthy HMRC compliance reviews.  

Need expert advice on the above? Contact Jas Rai, experienced employment tax advisor, for more information.