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8 years after the introduction of the Section 44 Onshore Intermediaries legislation, HMRC have taken their first case to tribunal against healthcare employment agency, K5K.


K5K was founded by Kulvir Singh Kooner in September 2012 and supplies self-employed healthcare workers. Initially, Kooner engaged individuals as agency workers however, as time progressed, some workers chose to contract via their Personal Service Companies (PSCs), without a change in their actual working practices, or their contractual terms.

Whilst K5K believed that they supplied their workers to clients on a self-employed basis; HMRC argued that K5K were in fact, facilitating false self-employment and therefore breaching the Onshore Intermediaries legislation.

History of the case

In 2021, the K5K case was initially heard by the First Tier Tribunal (FTT) who subsequently ruled that the employment agency had facilitated false self-employment amongst its workers between the tax years of 2014-2017. 

Described as “where an individual is falsely labelled as working under self-employment when in reality, they are completing the work in a manner that is in line with employment” (Qdos); it was proposed that through poor document control, a number of ‘self-employed’ contractors were incorrectly supplied with agency worker contracts despite their self-employment status.

Following HMRC’s victory, representatives of K5K unsuccessfully appealed on the basis that the Regulation 80 determinations failed to reference section 44 as their point of issue. Subsequently, K5K representatives then launched an appeal on the grounds that the FTT’s decision was time barred. Once again, this appeal was immediately rejected on the basis that HMRC issued notices within the appropriate timeframe.

Consequently, HMRC’s determination of £260,991 in unpaid tax and national insurance contributions (NIC) was upheld and the final judgement was released to parties on 12 July 2022.

Onshore Intermediaries legislation

S44 refers to the Onshore/Offshore Intermediaries legislation and was introduced in 2014 to prevent recruitment agencies from supplying sole traders whose employment status reflects employment, rather than self-employment. gives the following guidance on S44:

“If a worker personally provides services to a client; there is a contract between the client or a person connected with the client; and a person other than the worker and the services are provided by the worker and paid for by the client to that contract, S44 applies”.

Should an agency misinterpret S44, they may be liable to pay any unpaid tax and NI contributions, in addition to any further fines or penalties issued directly by HMRC. The intermediary would only be ineligible for these penalties if they are able to prove that the way the worker supplies services is not subject to supervision, direction or control (SDC) by any person, or if the remuneration received by the worker is already subject to PAYE and NIC (Squire Patton).

For many years, there has been a common perception that HMRC would not seek to apply the S44 legislation on PSCs, and that it would only be used by HMRC to challenge whether there was SDC present in the contractual chain in respect of a self-employed individual. However, with HMRC successfully arguing that S44 applies to PSC’s, it is clear that they are set to continue to apply this ruling when looking at such matters (The Cover).

Implications for agencies

Following the outcome of the K5K and Alan Parry tax case which identified the contract as the main issue when it comes down to determining an employment status; we should expect to see contracts between freelance workers and their employers placed under scrutiny by HMRC in the months ahead.

CEO of Qdos, Seb Maley draws attention to the fact that HMRC appear to be “scrutinising agencies’ compliance in this area” and that “a significant win could well give the tax office the confidence to ramp up its activity” (Qdos).

When it comes to forming a defence strategy; contract is ‘king’ (The Cover) and recruitment businesses working with contractors should ensure that their contracts are carefully drafted and reflect the correct working practices of the worker. They should also have documented processes that are regularly assessed and agreed by all parties (Employee Benefits).

Recruitment businesses need to have robust SDC processes in place which clearly demonstrates whether SDC does or does not exist. Should you be engaging workers on a self-employed basis without proof that SDC does not exist, you could be liable to pay unpaid tax and NICs to HMRC.

Future developments

The K5K case stresses the importance of categorisation in all contractors that are not subject to PAYE.

It’s fair to assume that HMRC will increase their scrutiny to those who appear to be facilitating false self-employment and non-compliant practices. Businesses must ensure that they understand their obligations under Section 44 (and any other areas of supply chain due diligence), or else risk facing the financial consequences that come alongside failure to comply.

How can I demonstrate full compliance?

Here at Bar2, we understand that the administrative complexities of operating within the labour supply chain is getting evermore challenging. We place ourselves as experts in the field, offering a range of unique services that go further than just payroll.

To find out more about our services and how we can support you in demonstrating full supply chain due diligence.

If you’d like to discuss our SDC process and how we can further protect your business, feel free to book in a 1:1 chat with our Product Manager, Laura.

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