Contracts for Services under PAYE

Legal position from 6 April 2014

Key points
Agencies, clients and operatives like the benefits, freedoms and flexibility of self-
employment
Agencies and clients like to know that operatives have paid all their tax and are in the
system
Operatives prefer not to have to complete a tax return, engage an accountant, or pay their
tax in large instalments under self-assessment
From 6 April 2014 the law changes. Any self-employed operative (which includes CIS
operatives) must be taxed under PAYE, unless it can be shown that the manner in which the
operative provides services is not subject to (or to the right of) supervision, direction or
control by any person (some key points underlined)
This means a right of control over the operative in a contract would fail this test.
It will be extremely difficult for agencies (i.e. employment businesses) to meet this new test,
as most agencies terms of business with their client give the client the right to control the
operative
Many agencies will be reluctant to amend their terms, as this will cause increased insurance
costs and risk of liability. In any case, many operatives are subject to day-to-day control on
site
The PAYE liability will rest with the agency regardless of who pays the operative, unless
somebody else is already operating PAYE (e.g. the umbrella company)
IMPORTANT: This new law does not change the operatives status for general employment
rights purposes, e.g. AWR; it is purely a tax-raising measure by HMRC
There are equivalent measures for National Insurance, with the liability also resting on the
agency unless another party is paying it
The Contract
Operatives are engaged on a PAYE contract (with a contractual right to holiday pay if
desired)
All tax and NIC is deducted and accounted for at source under PAYE in accordance with the
legal requirements after 6 April 2014
There are no tax returns for operative to fill in, unless they have other income outside of
PAYE


The operative can still claim expenses the contract is still overarching
But the contract remains outside of NMW and AWR so there are none of usual problems and
restrictions faced by umbrella companies and operatives
Legal Position more details
HMRC (e.g. PAYE) and employment (e.g. NMW) rules are applied differently
PAYE does not always mean employment: take for example agency workers who are PAYE
but are not employees. It may be a difficult concept to grasp, but after 6 April 2014 the law
requires PAYE to be deducted from all self-employed operatives where there is an
intermediary and a right of control
There have been several other cases where operatives have been on PAYE but have been
held by the Courts not to be employees (see case law)
The courts have accepted that the tax and social security contributions are deducted as a
requirement imposed on the employers by the Inland Revenue and that this is not, of itself,
indicative of the legal basis of the relationship between the employers and the casual staff,
for employment protection purposes. OKelly v Trusthouse Forte plc [1983] ICR 728
For additional due diligence:
o The contract has been checked against the governments own website at
www.gov.uk and is outside NMW
o The contract has been put through HMRCs online Employment Status Indicator (ESI)
and it confirms that it is a PAYE contract
Other factors
The contract is based on new HMRC legislation and existing case law precedent
There are no individual companies/dividends or self-employment so no MSC risk
It is important genuinely to agree the contract with the operative
As with any umbrella company model, expenses need to be genuine, properly claimed and
evidenced, and subject to checks and controls



The new legislation
Income Tax (Earnings & Pensions) Act 2003
44 Treatment of workers supplied by agencies
(1) This section applies if
(a) an individual (the worker) personally provides services (which are not excluded
services) to another person (the client),
(b) there is a contract between
(i) the client or a person connected with the client, and
(ii) a person other than the worker, the client or a person connected with
the client (the agency), and
(c) under or in consequence of that contract
(i) the services are provided, or
(ii) the client or any person connected with the client pays, or otherwise
provides consideration, for the services.
(2) But this section does not apply if
(a) it is shown that the manner in which the worker provides the services is not
subject to (or to the right of) supervision, direction or control by any person, or
(b) remuneration receivable by the worker in consequence of providing the services
constitutes employment income of the worker apart from this Chapter.
(3) If this section applies
(a) the worker is to be treated for income tax purposes as holding an employment
with the agency, the duties of which consist of the services the worker provides to
the client, and
(b) all remuneration receivable by the worker (from any person) in consequence of
providing the services is to be treated for income tax purposes as earnings from that
employment,
but this is subject to subsections (4) to (6).





Relevant case law
Express & Echo Publications Ltd v Tanton [1999] IRLR 367
Mr Tanton was found to be self-employed on the basis of the absence of a requirement for his
personal service, however HMRC required deduction of PAYE and National Insurance Contributions
and would countenance no other view. Tanton also won in the first instance Tribunal and the EAT.
OKelly v Trusthouse Forte plc [1983] ICR 728
The Operatives were held by the Court of Appeal not to be employees due to a lack of mutuality of
obligation, however they were included on the payroll with the employees and they had PAYE and
NIC deducted and were paid contractual holiday pay by Trusthouse Forte. The deduction of PAYE
and NIC was not indicative of the legal basis of the relationship.
The industrial tribunal accepted that the tax and social security contributions are deducted
as a requirement imposed on the employers by the Inland Revenue and that this is not, of
itself, indicative of the legal basis of the relationship between the employers and the casual
staff, for employment protection purposes.
It is freely recognised that the relationship of the applicants to the employers had many of
the characteristics of a contract of service. In our view the one important ingredient which
was missing was mutuality of obligation.
Stevedoring & Haulage Services Ltd v Fuller [2001] IRLR 627
The Operatives were held not to be employees, despite the deduction of PAYE and NIC. The
company lost in the ET and the EAT. Relevant terms of the contract were:
You are not an employee of the company and not entitled to any fringe benefits such as sick
pay, holiday or pension rights.
You will be paid only for the hours actually worked (and the rates were then set out) with an
eight hour minimum payment per working period unless otherwise agreed by you. From your
payment there will be deductions of income tax and national insurance contributions under
the PAYE scheme, in the same way as if you were an employee, but this is for administrative
convenience only........
I understand and acknowledge the conditions under which I will be employed by the
company on an ad hoc and casual basis, including the deduction of income tax and national
insurance contributions.


Clark v Oxfordshire Health Authority [1999] IRLR 125
Mrs Clark was a bank nurse subject to PAYE/NIC but was found to not to be an employee under a
contract of employment for lack of mutuality of obligation.