‘Section 44’ ruling lands agency £260,000 tax bill

Employment status, Tax

Employment agency deemed to have facilitated ‘false self-employment’

Healthcare employment agency K5K Limited has been ordered to pay a £260,991.21 tax bill after having had its appeal regarding the ‘Section 44’ legislation dismissed at a First Tier Tribunal hearing.

It’s a verdict which highlights HMRC’s increased focus on agencies deemed to have facilitated what’s known as ‘false self-employment’.

‘Section 44’, commonly referred to as the ‘agency legislation’ and ‘onshore intermediaries’ legislation, was introduced in 2014 to stop employment agencies from supplying sole traders whose employment status reflects employment, rather than self-employment.

If these rules are broken and ‘false self-employment’ is identified, the employment agency is liable for unpaid tax and national insurance contributions that ought to have been paid under an employment relationship. 

This is in addition to potential interest and any penalties issued by HMRC. 

 

What was K5K Limited judged to have done wrong?

K5K Limited provided workers as sole traders to a client despite the engagement reflecting employment, according to the First Tier Tribunal. 

As a result, the agency – which was set up by Mr Kulvir Singh Kooner, who was made redundant as a pharmaceutical analyst in 2011 – was deemed liable for missing employment taxes amounting to £260,991.21. 

 

What can employment agencies learn from this outcome?

Above all else, this case shows that placing workers under the incorrect employment status can have significant tax implications for employment agencies. As a result, rigorously assessing both the contract and working practices of those placed is paramount. 

Section 44 is arguably lesser-known tax legislation but the sums involved highlight the consequences of falling foul of these rules. 

The legislation, in contrast to IR35, has a narrow set of criteria. If one of Supervision, Direction or Control (SDC) applies to the worker, the worker must be taxed as an employee, not as a self-employed individual. In this sense, Section 44 is arguably easier to break than IR35, but the financial consequences can be just as notable. 

As our CEO, Seb Maley, explained to Employee Benefits magazine: “This case, in particular, shows that HMRC is scrutinising agencies’ compliance in this area – and a significant win could well give the tax office the confidence to ramp up its activity. 

“Along with highlighting the importance of compliance, the K5K case highlights the importance of ensuring contracts are carefully drafted and that a sole trader’s working practices align to that contract, are documented and regularly assessed.”

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