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Employment or agency - who pays PAYE? | accountingweb | image shows office workers

Agency wins case on premise of excluded service


This tribunal case involving an employment agency centred around who pays PAYE when the services are provided at premises not belonging to the client.

2nd May 2023
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Prisma Recruitment Limited operated both as an employment agency and business in the fields of architecture, interior design and workplace change. As well as introducing individuals to its customers who took them on directly, it also engaged and supplied individuals who remained on their payroll. The BGM Group Ltd (BGM) and its subsidiary, Space Data Technology Ltd (SDT), provided workplace consultancy services to major businesses including the BBC, Rolls-Royce and the Royal Bank of Scotland (RBS), as well as Barclays Capital Ltd (Barclays). BGM and SDT had their own staff who carried out the work but also hired individuals from Prima to work on specific projects. Prisma operated PAYE in respect of the individuals it supplied, deducting both income tax and Class 1 national insurance contributions (NIC).

In 2012/13 BGM got into financial difficulties and eventually went into administration in April 2013.  Prisma terminated all agreements with BGM and SDT, with the agency contracts ending on 28 March 2013. While Prisma had paid individuals up to this date it did not receive payments from BGM or SDT after the first week in January 2013 and did not pay income tax or NIC to HMRC after the beginning of January 2013. BGM owed Prisma close to £160k, which became a bad debt resulting in Prisma suffering a substantial loss, putting the business under severe pressure and financial difficulties. Understandably the director of Prisma, Timothy Loftus, pursued means of mitigating the company’s loss including tax and Class 1 NIC that they opined had been remitted to HMRC incorrectly and should be repaid to Prisma. 

Excluded services

Prisma’s appeal to the first tier tribunal (FTT) related to PAYE income tax and NIC as well as a number of VAT default surcharges. As far as PAYE is concerned, Prisma contended that the PAYE tax and NIC that the business had paid were not due. This was because the individuals had been providing services that constituted “excluded services” within section 47 (2) ITEPA 2003 and claimed overpayment relief for the income tax and NIC that had been remitted to HMRC. As far as the VAT default surcharges were concerned the appeal was on the grounds that it had a reasonable excuse for the late payment of VAT. This part of the appeal was dismissed given the tribunal decided Prisma did not have a reasonable excuse for having made late payments of VAT. 

The tribunal deliberated quite extensively on the question of its jurisdiction in the first instance, given HMRC’s argument that a determination under Regulation 80 of the PAYE regulations hadn’t been raised. In their view, this also meant that overpayment relief under schedule 1AB to the Taxes and Management Act 1970 (TMA) could not follow either. After detailed consideration, the tribunal concluded that HMRC had, in fact, made a Regulation 80 determination, albeit it hadn’t raised a formal assessment and Prisma had made a repayment claim within the specified timeframe under Schedule 1AB TMA. 

Premises were critical

The substantive issue as far as the operation of PAYE and deduction of tax and NIC is concerned centred on whether the individuals were providing “excluded service” for PAYE purposes in accordance with Section 47 (2) ITEPA 2003. If so, there would have been no obligation on Prisma to have operated PAYE and deducted tax and NIC, thereby also meaning any deductions they had made could be reclaimed. Critical to the matter was the identity of Prisma’s client given the meaning of “excluded services” in this context as being “services provided wholly… at other premises which are neither controlled or managed by the client nor prescribed by the nature of the service” as set out at Section 47 (2) (b) (ii). The tribunal agreed with Prisma’s claim that their client had, in fact, been BGM, the services had been provided at premises that were neither controlled nor managed by BGM, and the individuals worked all or most of their time at the premises of RBS. As such Section 44 ITEPA 2003 wasn’t in point. 

No PAYE obligation

In summary, the tribunal concluded that Prisma had no obligation to operate PAYE nor pay the income tax and NIC to HMRC and directed that the overpaid tax and NIC be refunded to Prisma. 

While it is only an FTT decision it provides useful commentary and opinion concerning application of the agency tax legislation at Section 44 ITEPA 2003 and the recovery of PAYE income tax at Regulation 80 of the Income Tax (PAYE Regulations) 2003 (PAYE Regs).

Given HMRC’s focus on supply chain due diligence the case provides some welcome food for thought.

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