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HMRC overcomes appeal on new agency rules | accountingweb
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HMRC overcomes appeal on new agency rules

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A healthcare employment company failed to convince the tribunal in the first appeal under section 44 of the agency legislation.

12th Sep 2022
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Healthcare employment agency K5K was left with a £269,991 bill in tax and national insurance after appealing against an HMRC assessment based on new agency tax rules.

The K5K Ltd vs HMRC case provided an insight into how the first tier tribunal (FTT) will consider appeals under section 44 ITEPA 2003 (the agency legislation).

There has been some focus on the impact of the judgment on the engagement by employment businesses and agencies of limited company contractors or personal service companies (PSC) and HMRC using s44 to challenge such contractual chains. 

While it is not impossible for HMRC to do so, in my opinion this judgment does not encourage this approach. At para 198 of the judgment, HMRC accepts that: “If the personal company is the contractual party… the appeal succeeds.” Given the comments made in the judgment, HMRC is more likely to challenge contractual chains involving limited company contractors under the IR35 rules given the changes to the off-payroll working legislation. 

Also when consulting on the draft amended legislation at s44, HMRC issued a specific note that confirmed its view that “the proposed agency legislation will not generally apply where a worker is engaged via a PSC, as all the… criteria will not normally be met.”

HMRC went on to qualify this further, stating: “The legislation will only apply when remuneration is received by the worker in consequence of providing the services. Therefore, dividends paid to the worker as a genuine consequence of their shareholding… will not normally fall within the new agency legislation.”

Current guidance

HMRC’s current guidance in its employment status manual (para 2051) continues to support the notion that: “A dividend received by the worker from the PSC will also not come within the agency legislation, as it does not arise from the provision of the worker’s services.”

To summarise, HMRC’s guidance reaffirms the view that the agency legislation is unlikely to apply to limited company contractors.

What happened in this case?

The law in ITEPA 2003 s44 applies in circumstances where:

  • an individual (the worker) personally provides services to another person (the client);
  • there is a contract between the client and another person (the agency); and
  • under or in consequence of that contract the services are provided or the client pays or provides consideration for the services.

Where the legislation applies, the worker is deemed to be an employee of the agency for tax purposes. Importantly, the legislation does include a couple of exemptions, and where either of these exemptions apply, s44 is essentially disregarded:

  • where it is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person; or
  • remuneration receivable by the worker already constitutes employment income.

At its core, the application of s44 was the subject of the K5K Ltd (K5K) case. 

Fundamental misunderstandings

There were fundamental misunderstandings (albeit unintentional) displayed by the director of K5K. Throughout the enquiry process, K5K was unable to provide any clear and cogent detail on how the business operated or details of the actual contractual agreements between the parties. Eventually, K5K argued that the engagement with the workers was in fact with each worker’s own limited company. HMRC was unable to agree this as the contracts between the parties did not appear to reflect this position. 

The tribunal found that while K5K had a number of different terms available, only one contract was found to be in place during the period under review. That contract was between K5K and the worker directly. Once this was established, it was a simple matter of applying the terms of the contract to the statutory provisions.

The tribunal decided that the contract between K5K and its clients was for the supply of the workers’ services and it was in consequence of that contract that the workers provided their services. Based on this conclusion, it was clear that s44 would apply subject to the exemptions.

Control point 

The tribunal considered whether the services provided by the workers were under the supervision, direction or control (SDC) over the manner by any person. To do this the terms agreed between the parties were reviewed. The worker contract expressly provided that by accepting an assignment the agency worker agreed to be subject to the SDC as to how the services were provided according to the hirer’s direction. A similar provision was included in the hirer terms. It was clear that the contracts included a right of SDC over the workers which, consequently, meant that the exemption could not apply.

The tribunal went on to comment further to suggest that SDC is a necessary feature of the regulated environment where the relevant services were provided. The statement from the tribunal would suggest such regulations are all that are needed to demonstrate SDC rather than looking at whether there is SDC over the manner in which services are provided.

Regulations similar to that described in the judgment, usually refer to health and safety requirements which, according to HMRC guidance in its employment status manual (para 2037), “Being required to comply with statutory requirements like health and safety procedures, is not determinative of a worker’s employment status, as all workers (employed or self-employed) must comply with these requirements”.

While this is a judgment does not set binding precedent, it is an important area for other employment businesses and agencies that engage self-employed operatives to consider closely, despite HMRC’s position on the matter.

Summary

This judgment does not in any way change the application of the legislation and there is no further guidance on how the courts will interpret and determine whether a worker is not under the SDC over the manner in which the services are provided.

What we do know is that the tribunal will review the contractual terms throughout the chain to establish whether a right of SDC exists to start with. I assume it is only if the tribunal finds that no such right exists that they will they consider the day-to-day working arrangements to further establish the position.

The burden to show this is on the taxpayer, so I would advise agencies that engage self-employed individuals to review all relevant contracts in the chain to establish whether a right of SDC exists and then review the day-to-day working arrangements to further support the argument that there is no SDC over the manner in which services are provided. 

This is and remains the crucial test to disapply the application of s44.

 

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