Is this the beginning of the end for PSC’s?

November 14, 2022

Victory by HMRC in a landmark recent case (K5K Ltd v HMRC [2022]) spells trouble for agencies and personal service companies

Eight years after the Onshore Employment Intermediaries: False Self Employment Legislation (s44 ITEPA 2003) coming into effect, HMRC earlier this year successfully challenged the engagement of personal service companies (PSC’s) through a recruitment agency where they argued that workers supplied through their own limited companies (PSC’s) were caught by this legislation making income tax and national insurance contribution payable on the income.

In making this challenge HMRC used the 2 fundamental changes brought in by s44 as key to their argument, namely:

  1. Withdrawal of the protection afforded by a substitution clause.
  2. it amended the supervision, direction and control test such that the legislation would automatically unless the intermediary (i.e. agency) could demonstrate that they there was a lack of supervision over the manner in which an individual provides its services together with a lack of direction and control on their part.

In finding in HMRC’s favour the judge made the following comments:

“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 none of the personal companies were a party in the contractual chain in relation to the supply to any of the end clients”

This decision makes it of paramount importance to fully understand the legislation and the need for written contracts which are correctly drafted.

The main issues to be taken from this case are:

  1. No company that provides PSC’s to end clients is not immune from a challenge by HMRC under s44
  2. Where HMRC believe evidence supports a charge, s44 gives them the power to assess what it sees as the correct tax and NIC position. Tribunals are now seen to support this action.
  3. ALL contractual paperwork MUST reflect the reality of the engagements and show the parties that have ACTUALLY entered into them and be signed and dated by all of those parties.
  4. All contracts must have continued due diligence as part of the contractual process.
  5. Ignorance of the rules is no defence.

How can Hentons help?

  1. Contract drafting
  2. Review of existing contractual arrangements
  3. Correct set up of working practices
  4. On call help on a day-to-day basis
  5. Insured solutions to cover fees if challenged by HMRC

If you would like to speak to one of our team, please contact Greg Langley by email, ( or call 0113 234 0000

Greg Langley

With five decades of tax experience, Greg’s experience extends to direct and indirect taxes, encompassing company restructures, mergers, and de-mergers.

In addition, Greg serves as a team leader and mentor, sharing his expertise with our tax team at Hentons.

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