A upper tier tribunal ruling has clarified the employment status of agency workers and confirmed the importance of substitution as a sign that personal services are not being supplied. Nick Huber reports.
In HMRC v Talentcore, (2011 UKUT 423 TCC - PDF version), the upper tribunal ruled that temporary workers doing promotional work at airport duty-free shops were not employees of the agency who supplied them. The decision should be “compulsory reading” for agencies who provide staff to third parties, according to a fellow of the Chartered Institute of Taxation (CIOT).
The judges confirmed an earlier first tier tribunal ruling in favour of the agency’s appeal over employment status agency rules that HMRC had claimed rendered it liable for PAYE.
Talentcore, which trades under the name “Team Spirits”, supplies staff to work at cosmetics concessions at airport duty-free shops. HMRC contended that as suppliers of personal services, the workers were employees and their payments should be subject to PAYE.
The upper tribunal ruled that the “consultants” supplied by Talentcore were not employed under agency rules, so Talentcore was not required to operate PAYE. In his July decision, Mr Justice Roth, praised the “admirable clarity” of the first-tier tribunal’s ruling on the case.
The first-tier tribunal decided the consultants were not employees because there was no “personal service”. The tribunal cited case law to support the view that a “full right” of substitution between workers meant that they were not employees under agency contract rules. If the person contracted to do the work did not need to turn up as long as a replacement is provided, there was no contract of service.
Talentcore selected consultants from a database of temporary staff to work shifts and this was accepted as evidence that a personal service was not being provided
“The fact that original consultant had complete freedom to arrange for a substitute if he wished, even if he did not actually do so, constitutes in my view an unfettered right of substitution, as found by the FTT,” concluded the judge in his upper tier decision.
Agency rules apply where a worker is under contract with an agency to provide services under the terms of the contract, and where the remuneration would not otherwise be employment income, commented Smith & Williamson.
The rules use two tests to decide whether the consultant is acting under a contract that requires him/her to provide a service; and whether the consultant is subject to a “right of control” by someone else about how the service is provided. If both two tests are met agency rules apply and the consultant is considered to be employed for PAYE and NIC purposes.
Recognising the difficulty HMRC faced on the personal services point of the case, its representative argued that even if the contract did not oblige the consultant to perform the service personally, he or she assumed an obligation to do it personally when they did the work.
“I do not see how it can possibly satisfy the statutory condition,” concluded Mr Justice Ross. The legislative definition of an 'agency contract' is based on the terms of the contract, which is entered into before the consultant starts to work the shift to which it relates and it is not replaced by a new and different contract once the shift starts, he explained.
“Since the FTT held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’,” he concluded.
Tax experts said that that the ruling it had important lessons for cases that hung on employment status and for agencies supplying workers to industries ranging from IT and construction. The case also highlighted how contract terms could have a “significant impact” on PAYE and NIC contributions.
“If it is possible to structure the contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided,” advised Smith & Williamson. “Such arrangements may be possible in sectors ranging from IT consulting, to tutoring and the provision of manual labour such as cleaners or builders.”
Andrew Gotch, a fellow at the CIOT, said the upper tier tribunal’s was a “sensible” interpretation of existing rules, and said that it should be “compulsory reading” for agencies who provide temporary staff to third parties. “This is yet another case where the Revenue’s approach seems to have run into the sand,” he said.
Ernst & Young said the impact of “substitutions” on personal services was an important factor in the upper tribunal’s decision.