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HMRC internal manual

Employment Status Manual

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HM Revenue & Customs
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Agency and temporary workers: the agency contract and the requirement for personal service

Applicable up to 5 April 2014

Section 47(1) ITEPA 2003

Section 44(1)(a) ITEPA 2003 requires that a worker personally provides or is under an obligation to personally provide services to the client. When a worker is actually undertaking an assignment they are providing their personal service which will be sufficient to satisfy the condition set out at section 44(1)(a).

The fact that the worker will provide personal service whilst on a particular assignment to satisfy section 44(1)(a) will not however be sufficient to satisfy the condition set out as section 44(1)(b) ITEPA 2003, unless the worker is required under the terms of the agency contract to provide the services personally.

Section 44(1)(b) is satisfied if the services are personally provided by the worker under the terms of an ‘agency contract’. Section 44(1)(b) needs to be considered in conjunction with section 47(1) which defines an ‘agency contract’ as a contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client. This requirement was not present in the previous agency legislation for tax, section 134 ICTA 1988.

The provision of a substitution clause within an agency contract

If under the terms of an agency contract the worker has a right of substitution, then that may indicate the worker is not obliged to personally provide services to the client. Whether or not there is an obligation to personally provide the services will depend upon whether the right of substitution is a genuine right and will depend upon the nature of the right - that is, whether the right is a limited or unfettered right of substitution. See guidance in relation to personal service and substitution at ESM0530 onwards.

Where it is found that the contract includes a genuine and unfettered right of substitution (that is, there is no obligation on the worker to personally provide services to the client), then the contract will not meet one of the required conditions for the agency legislation to apply. The contract will not be an agency contract as defined in section 47(1) and the condition at section 44(1)(b) will not be satisfied. Where this is found to be the case then remuneration receivable by the worker under the terms of the contract will not be treated as earnings chargeable to tax as employment income, the worker will not be treated as an employed earner for Class 1 NICs purposes and the agency/third party will not be treated as the secondary contributor for Class 1 NICs purposes.

See ESM7315 regarding the Upper Tribunal case of The Commissioners for HMRC and Talentcore Limited (t/a) Team Spirits [2011] UKUT 423 (TCC).

From 6 April onwards the existence of an ‘agency contract’ is no longer a qualifying condition that must be satisfied before the agency legislation can be applied. See ESM2034for the qualifying conditions which apply from 6 April 2014 onwards.