An article by Mark McLaughlin
The IR35 rules on services provided through intermediaries is well known to many taxpayers and tax advisers. The most common scenario is probably the ‘personal service company’. However, there is potentially an additional line of HMRC challenge to IR35, which is rather less well known. This is the ‘agency workers’ legislation (ITEPA 2003, ss 44- 47).
The agency rules broadly apply where:
• The worker (X) personally provides services under a contract with an ‘agency’ (Y) to a client (Z).
• The worker is (or could be) subject to supervision, direction or control; and
• The worker’s remuneration under the employment contract does not otherwise constitute employment income.
If caught by the agency rules, worker X’s services to client Z are treated for income tax purposes as an employment held with agency Y and all remuneration under the agency contract is treated as employment income. There are also provisions for National Insurance contributions (NICs) purposes, which can result in the deemed employment income being liable to Class 1 NICs. There are certain ‘excluded services’ under the agency rules, which apply to entertainers, fashion models and others, and (among other things) to services provide wholly in the worker’s own home (ITEPA 2003, s 47). However, the agency rules are otherwise quite broad in scope and, of course, can apply to business other than recognised employment agencies. There is anecdotal evidence that HMRC are seeking to apply the rules in an increasing number of cases. In Talentcore Ltd t/a Team Spirits v Revenue and Customs  UKFTT 148 (TC), the company appealed against PAYE and NIC assessments. The point at issue was whether the agency legislation applied. The appellant supplied individual consultants to cosmetic companies at duty free shops at airports.
There was no contract between the appellant and the consultants. The appellant was free to offer work or not, and the consultants were free to accept or decline the work when offered. The tribunal considered the agency legislation and case law, and held as follows:
- There must be an obligation on the worker to provide personal services. In Talentcore's case, the tribunal's view was that the temporary and ad hoc nature of the appellant's bookings prevented there being an obligation to provide personal services within the relevant legislation.
- A full right of substitution (i.e. where a person need never turn up) is not a contract of service, but more limited rights do not prevent it. In Talentcore's case, the tribunal found that there was an unfettered right of substitution.
- The agency legislation requires that the worker must be subject to, or to the right of, supervision, direction or control as to the manner in which he renders service. The tribunal considered that the legislation is vague about who must (or have the right to) exercise such rights, but noted that it normally seemed to be the client. In this case, the cosmetic company (and/or World Duty Free, which runs the duty free shops) had the necessary rights, but in practice there was little or no exercise of them.
The tribunal allowed the taxpayer's appeal, on the basis that there was no obligation to render or provide personal services within the agency legislation. It is understood that HMRC have appealed the decision to the Upper Tribunal, and that the case is due to be heard in July 2011.
Businesses involved in the supply of labour only (e.g. some construction firms) need to be aware of the agency rules and the circumstances in which they apply, with a view to ensuring that they are not treated as an agency for income tax and NIC purposes, where possible. In addition to the legislation itself, HMRC guidance on agency and temporary workers is contained in its Employment Status Manual at ESM2001 onwards. It confirms that the agency rules can apply to any worker who provides services through any third party (i.e. which need not be an employment agency). The contract between the worker and the agency will not usually be a contract of employment. HMRC sums up the conditions for the agency provisions to apply as follows (ESM2003):
1. The person contracting with the agency must be an ‘individual’;
2. The individual renders, or is under an obligation to render, personal service to another person - ‘the client’;
3. The individual is subject to, or to the right of, supervision, direction or control as to the manner of rendering such service;
4. The individual is supplied to the client by or through a third person (‘the agency’), and (a) (for tax purposes) renders those services under the terms of an agency contract between the individual and the agency, or, (b) (for NIC purposes) either
- earnings for such service are paid by or through the agency in accordance with arrangements made with the agency; or
- payments, other than to the individual, are made by way of fees, commission or a similar nature which relate to the continued employment of the individual;
5. Remuneration would not, apart from Pt 2, Ch 7 ITEPA 2003, be chargeable as employment income.
With regard to the 'personal services' requirement (condition 2 above), if the agency contract contains a substitution clause, HMRC accepts that the contract will not be an agency contract for tax purposes. However, the right of substitution must be genuine, and HMRC may look at the nature of the right, i.e. whether the right is a limited or unfettered right of substitution (ESM2011). The agency provisions potentially apply to professional workers in HMRC's view, in addition to tradesmen (e.g. labour-only construction workers) and others (ESM2014). However, HMRC acknowledges that a professional worker who is not subject to, or to the right of, supervision, direction or control over the manner in which the services are rendered, will not be within the agency legislation. HMRC guidance also confirms that the agency legislation does not apply where the contract for the supply of services is between the agency and a 'one man' service company, provided the contract is genuinely with the company (e.g. the company's name has not been substituted in a contract obviously drafted for an individual) (ESM2017). Of course, the IR35 legislation will need to be considered in the case of personal service companies instead.
Another recent case
The agency rules represent a genuine threat to many small personal services business. In another recent case to reach the tribunal (Serpol Ltd v Revenue & Customs  UKFTT 174 (TC)), HMRC raised an income tax determination and NIC decision on the basis that the appellant company was acting as an agency by supplying certain workers to Bedfordshire Police and as such the workers fell within the agency legislation. The company appealed. The tribunal held on the particular facts of the case that certain categories of worker were required to carry out their duties "as prescribed by the nature of the services" and so fell within the agency legislation when carrying out those duties. However, other categories of worker (i.e. whose duties involved taking witness statements) were held to be excluded from the agency provisions, as their duties were not prescribed by the nature of the services, but took place where it was convenient for the witnesses, which could be anywhere at a time selected by the witness. Those workers whose projects allowed them to work from home were also held to be excluded from the agency legislation when carrying out such projects. The company's appeal was therefore allowed in part. It may prove difficult to demonstrate that the agency legislation does not apply. In practice, potentially affected businesses can help their cause by ensuring that a worker is not being 'supplied', either as a matter of fact or based on contracts or other documentation between the parties.