ESM2001 - Agency workers: the legislation

Section 134 ICTA 1988/Part 2 Chapter 7 ITEPA 2003

SS (Categorisation of Earners) Regulations 1978 (SI 1978 No.1689) Regulation 2 and paragraph 2 in column (A) of Part I of Schedule 1

Subject to certain conditions, the agency legislation applies where a worker provides services to an 'employer' through a third party in such a way that, technically, the worker is not an employee of either. The third party will often be an employment agency but the legislation may apply to any worker who provides services through any third party. Before the legislation was introduced an agency worker who was not employed by either party was liable to Class 2 NICs and assessed under Schedule D.

Where Section 134/Part 2 Chapter 7 applies, the services rendered by the worker are, for income tax purposes, treated as if they were the duties of an employment held by the worker. The remuneration receivable is treated as an emolument/earnings and is therefore chargeable to tax under Schedule E/as employment income. Accordingly, all the Schedule E/employment income rules apply and PAYE must be operated by the payer.

Where Regulation 2 applies, the worker is treated as an employed earner for Class 1 NICs purposes. The agency is treated as the secondary contributor for Class 1 NICs purposes by virtue of Regulation 5 and paragraph 2 in column (B) of Schedule 3 to the ‘Cats Regs’.