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HMRC internal manual

Employment Status Manual

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HM Revenue & Customs
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Particular occupations: computer staff supplied by agencies

A copy is set out below of a circular issued to its members by the Computing Services Association (representing agencies supplying clients with computer staff) giving guidance on the circumstances in which PAYE must be operated by agencies by virtue of Section 134 ICTA1988 - now Section 44 ITEPA 2003. Although HMRC has approved the circular, it is intended only as guidance and is not binding on HMRC or on members of the Association. It does not imply any departure from the HMRC’s interpretation of Section 44 as set out in ESM2000 onwards.

‘Computing Services Association guidelines for the application of the provisions of Section 134 ICTA 1988

1. General

Section 134 operates to treat certain individuals, who render personal services to clients under the terms of a contract with a third party, as though they were employees so as to require tax to be deducted under PAYE from the remuneration paid.

As there are many situations in the computer service industry where members use self-employed or independent individuals to service their clients, these notes are issued to clarify and explain the provisions of the legislation so as to help members decide whether or not tax should be deducted under PAYE from payments made to such individuals. Although these notes have been approved by the IR, they are merely issued for guidance and do not constitute any binding authority on either the individual members or the Revenue generally.

2. Conditions

For the provisions of the Section to apply, four conditions must be present in any arrangement between the member and an outside worker. These are

  • The individual worker must render personal services to a client.
  • The worker must be subject to the right of supervision, direction or control.
  • The personal services must be rendered under the terms of a contract between the individual and the member.
  • The remuneration payable under the contract must not otherwise be regarded as arising from an employment.

Each of these conditions is examined in greater depth in the following paragraphs and all four must be present before the Section can operate.

3. Personal services rendered to a client

One difficulty which arises in interpreting the legislation is the determination of whether an individual is rendering services to a client or to the member. The answer to that question will normally be found in terms of the contract between the individual and the member and whether, under those terms, be they in writing or otherwise, the individual or the member is taking legal responsibility for the services performed. In the event that the work for the client is negligent, or ineffective, who would take prime responsibility for putting it right the individual or the member? If the member is the person primarily responsible, then the individual is unlikely to be rendering personal services to the client and Section 134 will not apply. However, in those circumstances the terms of the arrangement or contract between the member and the individual may well be such that the individual is an employee of the member and, if so, his remuneration will be subject to PAYE quite apart from the provisions of Section 134.

4. The right of supervision, direction or control

The legislation requires that, for the Section to operate, the individual worker must be subject to, or to the right of, supervision etc as to the way in which he renders the services. It does not matter whether that right may be exercised by the client or the member. If the terms of the arrangement with the individual are such that he is directed in his work in the way that an employee doing that work would be directed, then this condition is satisfied. If the right of control resides with the member then that, of itself, may be sufficient to make the individual an employee of the member quite apart from the provisions of the Section.

5. A contract between the individual and the member

The Section requires the individual to render services to a client under the terms of a contract between the individual and the member. Such a contract need not be in writing. Services may be rendered under the terms of a verbal contract and the Section will still apply.

6. Remuneration under contract not otherwise taxable as income from employment

The Section only applies where the terms of the contract between the individual and the member are not such as to make the individual an employee for tax purposes. Where a master-servant relationship is established between the individual worker and the agency the individual’s remuneration will be subject to the operation of PAYE quite apart from the provisions of Section 134. Only where the arrangement is such that no master and servant relationship between the individual and the member is established, does the Section operate to treat the individual as though he were an employee.

7. Conclusion

Where a member engages the services of a self-employed or independent worker for the benefit of a client, if the terms and conditions under which that worker renders those services are similar to those which would normally apply to an employee, then tax should be deducted under PAYE from any remuneration paid.

Only where the Inspector of Taxes dealing with the member’s own tax affairs has confirmed that he is satisfied that the arrangements with a particular self-employed worker, or group of self-employed workers, are outside the scope of Section 134, should remuneration be paid without deduction of tax.’