TC09663 - [2025] UKFTT 01250 (TC)

The Agency Rules that were, until 2014, found at ss 44 to 47 ITEPA re-classified most agency workers as if they were employees so that PAYE had to be operated on their pay. They came into the employed income net by virtue of these sections, and into PAYE by virtue of reg. 10 of the PAYE Regulations. The law was changed (as a result of loopholes being applied) by the Finance Act 2014 (“FA 2014”) so that there was no longer a requirement for personal service for the Agency legislation to apply. The changes mean that if there is more than one UK agency in the chain, it is the UK agency which contracts directly with the client that is deemed to hold an employment with the workers, and is responsible for operating PAYE/NI. The new Agency legislation is found in the same numbered sections (i.e., ss 44 to 47 ITEPA supra).

Section 44 ITEPA applies if “three conditions” set out under s 44(1) obtain:

If s 44 applies, then the consequences as provided by s 44(3) follow so that:

“Excluded services” comprise services as an actor, singer, musician or other entertainer; or as a fashion, photographic, or artist’s model; and the services are provided through a third-person.

The worker must also be subject to “SDC” as to the manner in which the services are provided. The burden of proof is on the Appellant to disprove this. Even if all three conditions under s 44(1) are met, the application of s 44 is negated if “it is shown that the manner in which the worker provides the services is not subject to (or to the right of) SDC by any person”: s 44(2)(a). The SDC test is concerned with how the work is done, not what is done. However, a direction means a definite instruction.

Where Chapter 7 Part 2 applies, then the services rendered by the worker are, for income tax purposes, treated as if they were duties of an employment held by the worker. Accordingly, all employment income rules apply and PAYE should be operated by the payer. The Agency legislation does not apply where there is an employed relationship, either with the client or with the agency. A person is either an employee or an agency worker. This distinction governs who pays PAYE (in that if the worker is an employee of the client then the client is responsible for PAYE). It also has a bearing on whether a company is a managed service company, or an IR35 company.

It is pertinent to note that during the appeal hearing, Mr Young referred to the old version of the legislation. Indeed, Mr Young referred to Talentcore in his closing submissions; in particular, to the concept of an agency contract and the need to provide services. Talentcore however deals with the old legislation, which has been changed to remove the suggestion of an obligation to provide personal service.The 2014 change was explained in the consultation document, “Onshore Employment Intermediaries: False Self-Employment”, dated 10 December 2013, as being to tackle arrangements which exploited weaknesses in the existing legislation. Paragraph 4.2 of the consultation document states that:

“The proposal is to strengthen existing legislation relating to employment agencies by removing the obligation for personal service. Instead the legislation will focus on whether the worker is subject to, or the right of, supervision, direction or control as to the manner in which the duties are carried out.”

Both parties in the appeal before us are in agreement that:

These matters are not, therefore, in issue between the parties.

In respect of s 44(1)(b), there needs to be a contract between the client and a person other than the worker; the client or a person connected with the client. In the circumstances of this appeal, we are satisfied that there was a contract between each of the Appellant’s end-clients and the Appellant. In the educational due diligence meeting, Mr Stone confirmed that the Appellant provided the services of the dog-handlers to the venues. The venues would then pay the Appellant for the services and then the Appellant would, in turn, pay the dog-handlers for such services. This is evidenced in the invoicing whereby the Appellant sends the invoices to its clients for the services provided. Neither Mr O’Ryan, nor Mr Thornborrow, had seen the contracts between the Appellant and its end-clients. They did not, however, deny their existence.

The Appellant’s ‘client list’, which we have had the benefit of seeing, listed 36 clients. In examination-in-chief, Mr Stone stated that the Appellant had approximately ten clients. When taken to the list, he explained that that was the list of all of the Appellant’s clients, at one point or another. He could not, however, say how many clients the Appellant had during the relevant period. Materially, the dog-handlers did not contract directly with the end-clients. The dog-handlers invoiced the Appellant based on the number of hours that they worked, billed at a set-rate which could go up for night work and during public holidays. The contracts, along with the terms and conditions between the Appellant and its end-clients, clearly show that the condition in s 44(1)(b) is satisfied.

Section 44(1)(c) provides that “under or in consequence of that contract – (i) the services are provided, or (ii) the client “pays, or otherwise provides consideration, for the services”. Only one of these conditions require to be satisfied. Mr Stone provided HMRC with three contracts between the Appellant and its end-clients. Contrary to Mr Young’s submission that HMRC “cherry-picked” the contracts, the contracts were exhibited to Mr Stone’s own witness statement. Under those contracts, the Appellant agreed to provide search-dog operatives, and their dogs. We have set out an example of such a contract in the “Background Facts” above. In return, the fee paid to the Appellant was calculated based on the number of search dog operatives and dogs provided (as well as the number of hours that they worked).In this appeal, the services are provided because the contract between the Appellant and each of the clients requires the Appellant to provide dog-handlers, with their dogs, to work on the client’s site. Under that contract (or in consequence of the contract), the client pays the Appellant for the work which is performed by the dog-handler. The dog-handlers then invoiced the Appellant, and they were paid. Consequently, therefore, the condition in s 44(1)(c) is satisfied.

We now turn to the condition at s 44(1)(a), which is the only live issue.