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Talentcore decision sets mark for substitution

28th Oct 2011
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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.

Replies (10)

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By [email protected]
30th Oct 2011 06:33

Let's get it sorted

I our opinion the whole issue of self employment status should be put out to consultation with a view to getting it sorted once and for all.  There is enough case law and expert opinion to form a set of rules and tests to put it into statute so everyone can move forward with confidence.  The business world needs certainty to allow it to trade out of this recesson.  The hardest hit industry is the constructon industry and if this country is to recover this sector needs to move forward with confidence, with fair competition and without the threat of financial uncertainty.

a&c chartered accountants

Thanks (2)
By johnjenkins
30th Oct 2011 22:27

The best way

forward in my view is that the issue of employment status is for HMRC to keep their noses out. After all the only reason all this palaver is going on is the intent of HMRC to raise any money they can however they can.

Thanks (1)
Should Be Working ... not playing with the car
By should_be_working
31st Oct 2011 12:00

Do I understand this correctly?

So if an individual, working via a one-man limited company, works via an agency, the key is the substitution right inherent in the agency/client contract, rather than any between the contractor and agency?


On another aspect:

"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"

So we are definitely back to legal substance rather than substitution in practice then? Fine.


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By johnjenkins
31st Oct 2011 12:35

I think the two contracts are different.

One is to decide whether Agency rules apply and the other to decide whether IR35 applies. I assume both contracts had a sustitution clause. Had that not been the case HMRC might have had some grounds for appealing.

Still it does look as though HMRC are losing the battle in deciding who should be self-emploed.

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By cfield
31st Oct 2011 13:33

Shades of substitution

The way I read it, it was the consultant's "unfettered" right of substitution that won the case for the agency. If the right is truly unfettered, then it should not matter whether the right has been exercised or not.

Contrast that with a typical IT consultant where the end-user would probably wish to vet any substitute he/she was proposing. The right of substitution would then not be unfettered and it would be necessary to show that it had been exercised in order to prove the clause was valid.

I'm not an employment law expert but that sounds like an important distinction to me, and probably applies to both IR35 and the agency rules.


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By johnjenkins
31st Oct 2011 14:20

Then you come up

against the word substitution and who can be a substitute. Obviously a brick layer cannot be a sustitute for a computer bod. I can't see how it matters if the substitute needs to be vetted and really you would only need to add like for like in the substitution clause for it to be valid. I'm sure the tribunal would take a commonsense approach.

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By cfield
31st Oct 2011 14:35

Missing the point a bit

Of course substitutions must be like-for-like. That goes without saying. The point I was trying to make is that many end-users need to vet subsititutes as a matter of HR policy (not to mention the security aspects) so the right of substitution is not usually unfettered for contractors even if they propose someone with the right skill-set.

For that reason, I wouldn't have thought this case would impact much on a typical IR35 scenario.


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By johnjenkins
31st Oct 2011 14:58

To that end you

could never have a truly unfettered substitution clause. Especially where children are involved. My understanding is that the consultant did not have to do the work personally and that's where the unfettering comes in. We are talking about Airport duty free shops so I'm sure there would have been some vetting going on.

The only time I feel a substitution clause could be challenged  is if the client had specifically asked for that particular person. Then it becomes personal and not services.

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By Jack the Lad
31st Oct 2011 18:05

Contract for Services

One can only hope that this government starts cleaning up the tax legislation, not least IR35 and employment status.

Meanwhile, we should ensure that our clients have a proper Contract FOR Services in place, with all bases covered, not just the substitution clause, so that any challenge by HMRC can be successfully argued.

I recently spent nearly 2 years arguing ( successfully ! ) that a client's Contract for Services was indeed that, and not a Contract of Service, ie an employment: this was challenged by HMRC notwithstanding that it was carefully drawn up ( with many references to "freelance contractor" ) by the "employer", who then applied PAYE incorrectly !   I included all income in the client's accounts, and subsequently recovered all excess tax and Class 1 NICs.

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By ChrisL
08th Nov 2011 17:30

Personal Service was the point at issue

Rather than getting carried away with general employment status and IR35, I believe that the principle of this case should be focused on prescribed conditions expressed by the UT. These were clearly and mainly based on whether or not the worker was performing the services personally. HMRC appears to have ignored what happened in practice and then apparently adapted their skeleton argument to a scenario after the subsitute was put in place.   

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