s44: a new line of attack for HMRC?

s44: a new line of attack for HMRC?

This important case highlights an unexpected challenge by HMRC under s44 ITEPA 2003 into income earned by limited company contractors. Does HMRC have a new weapon in their arsenal?

More than eight years after the introduction of The Onshore Employment Intermediaries: False Self-Employment Legislation (s44 ITEPA 2003), we have the first Tribunal ruling, K5K Ltd v HMRC [2022] UKFTT 217 (TC08450). The decision is both a salutary lesson in understanding the regulatory framework and re-affirms the importance of written contracts. Not only this, but it is also a landmark decision with potentially far-reaching consequences for recruitment agencies and other intermediaries.

What will concern agencies, labour only providers and commercial contractors in the contractual chain, is that many commentators felt that s44 would only be used by HMRC to challenge whether there was supervision, direction and control being exercised by any party in the contractual chain in respect of a self-employed individual.

Here, HMRC have argued that s44 applied to engagements involving workers supplied through their own limited companies, usually referred to as personal service companies (PSCs) (the term used throughout the judgement was ‘personal companies’). This is quite a departure from the norm as during the period under review (2014-2017), HMRC could easily have argued that IR35 applied to these engagements. By seeking to apply s44, it meant that rather than an enquiry into a number of smaller taxpayers, individually, they were able to focus their gaze on one, single, larger taxpayer – K5K the recruitment agency.

This approach and judgement in favour of HMRC rather reinforces the reason why s44 is often referred to as the ‘agency legislation’.

What is s44 Income Tax (Pensions & Earnings) 2003?

As this is the first tribunal judgement which centres on the application of s44 ITEPA 2003, it is worth summarising ‘The Onshore Employment Intermediaries: False Self-Employment Legislation’ and how it is applied. It affects companies which provide individuals for work purposes to end clients. A basic illustrative example can be shown as Company A - provides Worker B - to Client C.

The legislation replaced and amended a previous version of s44 and came into effect in the 2014/15 tax year. It brought in two fundamental changes to the legislation itself:

  1. it disposed of the ‘agency contract’ definition which allowed for contracts which did not oblige personal service (i.e. containing a right of substitution) to be outside of its provisions, and;
  2. it amended the supervision, direction and control test and shifted the burden of proof such that the legislation automatically applies unless the intermediary (i.e. agency) can show that there is a lack of supervision, direction and control (including any right of) over the manner in which an individual provides its services.

Where HMRC can argue successfully that s44 applies, the intermediary (in this case K5K) providing the worker(s) will be responsible for ensuring all payments made to the individuals are subject to tax and NIC.

S44 is complex legislation that establishes additional burdens and responsibilities on to the relevant parties in the contractual chain. Given its purpose to apply tax and NIC at source, this led to a rise in the number of individuals operating through umbrella companies and it was widely accepted that HMRC would not ordinarily seek to apply the legislation on PSCs.

However, this case shows that HMRC can, and will, seek to the apply the legislation to any workers, including those operating via their own limited company.

K5K Limited (K5K) background

The company was incorporated in September 2012 following the director’s (Mr Kooner’s) redundancy in July 2011 as an analyst with a pharmaceutical company. Having explored several options, post his redundancy, Kooner decided to start a business in the recruitment sector, but due to his lack of experience felt that his best option would be to purchase a franchise business, which he did for an initial fee of £15 - £20K. This gave him a franchise license to trade in Middlesex and Kooner hoped to tap into the ongoing support and guidance from the franchisor that would enable the business to grow and be successful.

The business of K5K was for the provision of health care workers and registered nurses to care and nursing homes. Individuals were initially engaged as agency workers and formed part of a ‘bank of workers’ built up by K5K over its subsequent years of trading. As time progressed, some workers moved to operating via their PSCs, but with no real change in their actual working practices or their contractual terms. Ultimately, the contractual paperwork was the main bone of contention for both HMRC and the Tribunal.

Through his efforts Kooner did manage to eventually grow the business from around a bank of 25 health care workers and five nurses in 2014 to 125/130 in 2017, of which 20 to 25 were nurses. The number of end clients practically doubled from 30-40 during that time period, with turnover up from £1.1m to £1.5m and reaching £1.6m by 2018/19.

Case specifics

The case was heard by the First Tier Tribunal (FTT) over two separate sittings, 3 to 5 February 2021, and 30 June to 2 July 2021 and presided over by Judge Heidi Poon, with both parties being represented by barristers. The final judgment was released to the parties on 12 July 2022, a year after the final hearing date.

On the basis that the contracts were between K5K and the individual workers and not their PSCs, it was HMRC’s position that s44 applied to the engagements during the tax years 2014/15 through to 2016/17. Therefore, payments made to the PSCs should be treated as ‘earnings’ for income tax purposes and also for the equivalent National Insurance provisions.

On 5 July 2018, HMRC issued a total of 18 decision notices to K5K: three Regulation 80 determinations for income tax totalling £144,502 for the three tax years 2014/15 to 2016/17; and 15 Section 8 Notices for NICs totalling £116,489, each of which concerned a named worker and covered the same tax years.

The combined total amount sought by HMRC was £260,991, a figure that was not disputed, although K5K sought to challenge the determinations on a procedural point that it was not clear from the determinations that s44 was HMRC’s point of issue meaning that K5K’s grounds of appeal did not take that into account.

At a separate tribunal applications hearing, a letter was produced which had been issued by K5K’s representatives which conceded that its client accepted the validity of the assessments and HMRC’s position to use the s44 argument, notwithstanding that it was not mentioned in the determinations.

With that in mind, the Judge decided to dispose of K5K’s application, and instead gave permission for K5K to provide an amended ground of appeal in relation to the determinations. However, at the FTT itself, K5K’s representatives sought to introduce new grounds of appeal, arguing that certain determinations were now time barred. This was challenged by HMRC’s barrister and the Judge dismissed the grounds.

During the enquiry itself, HMRC had become increasingly frustrated with Kooner and his representatives, who had either repeatedly ignored HMRC’s request for specific contractual documentation relating to K5K’s engagements with the PSC and its end clients, or submitted unsigned generic contract templates that in no factual way could be tied to the 2014-2017 enquiry period or to any specific engagements with the PSCs or end clients. In fact, one particular contract had the date “2018” stated in the footer, which, of course, post-dated the enquiry period.

Due to the lack of co-operation, on 9 December 2020, HMRC applied to the FTT for a Disclosure Notice requesting directions for the disclosure by K5K of specific contractual paperwork and further correspondence between it, the PSCs and its clients. Not surprisingly, given its prior conduct on the release of documentation up to that point, K5K via its representatives, appealed against the disclosure application. The appeal grounds being that relevant documentation had already been disclosed to HMRC and that it would take significantly more time to collate the necessary documentation requested - somewhat contradicting the initial point of appeal! Despite the initial disclosure application being set aside, the FTT did eventually issue directions at the February hearing.

Judge Poon commented that “The process to establish the relevant contractual terms that governed the working arrangements during the Relevant Period within these proceedings was akin to a trial within the trial”, further demonstrating the difficulty HMRC had faced in obtaining the applicable contracts from K5K and which ultimately led to the hearing being prolonged further than perhaps necessary.

Eventually, in order not to waste any further time, the parties agreed to proceed on the basis that the relevant contracts to the enquiry period were the contracts referred to as ‘the Worker Contract – Contract for Services for Agency Workers’ between K5K and the PSCs and ’the End Client / Hirer Contract”’ to provide one or more workers in their personal capacity on assignments. It should be noted that none of these contracts were signed.

The contract templates for ‘Terms of Engagement with a Limited Company Contracts who has not opted out of the Conduct Regulations (within IR35 and under SDC)’ and ‘the Hirer Terms’ between K5K and its clients, which had been produced on 12 May 2020 (referring to 2018 in its footer), were conceded by K5K’s representatives not to have been in place during the enquiry period and were therefore ignored.

It would seem that ‘the Worker Contract’ was relevant to both agency workers and the PSCs who, as mentioned previously, had in the main been engaged by K5K as temporary agency staff prior transferring to the use of a PSC. It should also be noted, that given the nature of the work involved, working with vulnerable people, the PSCs were unable to ‘opt out’ of the Employment Agency and Employment Business Conduct Regulations 2003, which assumes the default position of the worker being under the control of a hirer. Also, the contracts expected the agency worker (which also infers the PSC) to work under the supervision, direction and control of the hirer, a nail in the coffin when trying to demonstrate that S44 does not apply.


The FTT considered the amended grounds of appeal from K5K that the validity of the Reg 80 Determinations and Section 8 Notices on the basis that they did not specifically reference s44, but Judge Poon found significant precedence to demonstrate that it was the principle involved and therefore found that all assessments were valid. They then moved on to consider the substantive issue: whether the engagements between K5K and the various PSCs during the tax years under enquiry fell within s44 such that K5K was liable to pay tax and NIC on all payments made to the PSCs.

Judge Poon referred to the documents presented as part of submissions by K5K, notably the contracts. Kooner’s witness statement was found to contain defects which rendered the statement as either inaccurate or incomplete. While, on balance, it was believed that Kooner had not set out to mislead the FTT, she felt that he did not participate in the preparation of the witness statement with appropriate attention and that his evidence contained several inaccuracies which were material to the facts at issue.

With regards to the ’worker contract’, the following facts were found by the FTT:

  1. The same worker contract applied to all workers contracting with K5K, and there was no distinction made between workers contracting to work in their personal capacity or via their personal companies.
  2. K5K received the template worker contract from the franchisor and inserted the name of the worker by hand under the definition of ‘agency worker’. The parties to the contract were expressly stated to be K5K and the worker.
  3. The document was signed by the worker in his/her own capacity and by Mr Kooner on behalf of K5K.
  4. There is no reference in the template worker contract to any personal company.
  5. The franchisor’s annual checks of the business of K5K included that the correct contracts had been signed by each worker.
  6. The contractual terms in force between K5K and each worker were those contained in the template worker contract, which included:
    1. The worker agreed, in respect of any ‘assignment’ they accepted, to perform the assignment services
    2. K5K agreed to pay the worker the agreed rate of remuneration
    3. Where the worker accepted an assignment, the worker was placed under a number of personal obligations: fulfilling the assignment, agreeing to accept the direction, supervision and control of any responsible person in the hirer’s organisation and observing the rules of the hirer’s establishment

With regards to the ‘Terms of Engagement with a Limited Company Contracts who has not opted out of the Conduct Regulations (within IR35 and under SDC)’, the following facts were found:

  1. During the relevant period, the franchisor did not provide the appellant with any template contract tailored to the appellant engaging a worker through a limited company (the template LCC Contract was provided by the franchisor only in 2017).
  2. The worker contracts were the only contracts extant in the relevant period.
  3. Any worker who changed from working in her own capacity to (supposedly) working through a personal company remained on the same contractual terms as set out in the template worker contract during the relevant period.

It was found as a fact that the ‘end client/hirer contract’ was the relevant contract for the purposes of the legislation during the enquiry period.

Judge Poon summed up the position as follows: “We conclude therefore that all relevant workers (notwithstanding their Personal Companies) were contracting in their personal capacity as the named agency worker in the worker contracts with the appellant, and that none of the personal companies were a party in the contractual chain in relation to the supply of LCCs to any of the end clients”.

The appeal was therefore dismissed.

Markel’s View

It is highly unusual to see s44 mentioned in the context of contractual arrangements that include PSCs as typically s44 challenges focus on engagements relating to the self-employed. The question is whether HMRC see this as a profitable, new line of attack against what they perceive as false self-employment.

Nevertheless, this is also a case which highlights the importance of how a business operates and what processes, including any contractual documentation, it has in place. In this case, the facts presented combined with the lack of supporting contractual paperwork, it is easy to understand why HMRC proceeded with this case and why the FTT found in its favour.

The main points to take on board from this case are as follows:

  1. A company that provides PSCs to end clients is not automatically immune from a s44 challenge by HMRC.
  2. HMRC can use deeming provisions to create what it sees as the correct tax and NIC position. Where the evidence supports such action, Tribunals will likely find in HMRC’s favour, as it has done in this case, by ignoring the PSC’s existence.
  3. Critically, all contractual paperwork must reflect the reality of the engagements and the parties that enter into them.
  4. All contacts must be signed and dated by the relevant parties and continued due diligence must be part of the engagement process.
  5. Ignorance or naivety offer no defence against an HMRC challenge, whether that be s44, IR35 or general employment status. All companies that engage sole traders or PSCs must understand the risks and responsibilities and take the required action at an early stage.

Although this case focuses on a recruitment agency, it is not simply relevant to that type of business or in fact any specific type of industry. Any company that engages PSCs or sole traders needs to take note of this judgement and would be advised to look at how they operate and what processes, including any contractual documentation, they have in place. We have always made the point to our clients that ‘contracts are king’ when it comes to forming a robust defence strategy against a HMRC challenge. We have always vehemently advocated that as the legislation requires the taxpayer to show a lack of SDC, then all contracts must specifically show this – and this case clearly proves the point.