ESM2051 | Agency and temporary workers: agency legislation - provisions from 6 April 2014: service companies (including PSCs)

From HM Revenue & Customs · Employment Status Manual

Agencies (see ESM2033) are third parties who provide workers to clients. They are often employment or recruitment businesses but the agency legislation will also apply in other circumstances when a worker’s services are provided under or in consequence of a contract between the client (or a person connected with the client) and the agency.

This includes when a worker sets up a company (sometimes known as a personal service company or PSC). In these circumstances, the PSC is an agency through which the worker is providing their services to clients and consideration must be given as to whether the agency provisions at Chapter 7 of ITEPA 2003 (for tax) and the Categorisation Regulations (for NICs) will apply, see ESM2031. This is regardless of whether the PSC contracts directly with a client or via an arrangement with another third party.

PSCs should bear in mind that:

any wage or salary paid to the worker by the PSC during a tax year is employment income. The PSC must operate PAYE on these payments and remit the appropriate income tax and NICs to HMRC at the appropriate time via RTI. Therefore this income will not come within the provisions of the agency legislation.
a dividend received by the worker from the PSC will also not come within the agency legislation, as it does not arise from the provision of the worker’s services. It will normally be taxable under Part 4 of the Income Tax (Trading and Other Income) Act 2005. However, relief is available on the distribution up to the amount of any deemed employment payment treated as made by the PSC to the worker.

The agency legislation and the managed service company and Intermediaries legislation (IR35):

The agency legislation takes precedence over the managed service company and Intermediaries legislation (sometimes known as IR35). If the agency legislation does not apply, or remuneration paid to the worker from any party in consequence of providing the services is not fully taken into account under the agency legislation, then the PSC must go on to consider if the provisions of the managed service company legislation apply. PSCs which do not meet the definition of a managed service company must then go on to consider if the IR35 legislation applies, see ESM3000.

The order in which PSCs must consider and fully apply relevant legislation is as follows:

1). Agency legislation
2). MSC legislation ESM3500
3). IR35 legislation, see ESM8000

The agency legislation will not apply if 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, see ESM2037, by any person. In these circumstances, the PSC must have in its power or possession evidence to show that this is the case, see ESM2042.