Under the agency legislation in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), an agency or intermediary is treated as the employer for Income Tax purposes, regardless of the worker’s formal employment status. This means the agency is responsible for operating PAYE, and if it fails to do so correctly, HM Revenue & Customs (HMRC) can recover any unpaid tax, interest, and penalties from the agency rather than from the worker.
This legislation can create uncertainty for businesses using intermediaries, as the rules are complex and errors can lead to significant financial liabilities.
The First-tier Tribunal (FTT) decision in Tyler Security Limited v HMRC shows that the agency rules can apply in a wide range of circumstances and businesses operating similar models need to be aware of these provisions.
Correctly analysing contractual and practical arrangements – and accounting for any PAYE and National Insurance contributions due from the outset – is essential to avoiding financial risks.
Case background and context
The appeal concerned the application of the agency legislation in ITEPA to specialist dog-handlers supplied by Tyler Security Limited to its end-clients for the purpose of providing security and search-dog detection services at events and venues.
Tyler Security challenged a Regulation 80 PAYE determination, which HMRC issued on the basis that the agency rules in ITEPA applied to the dog-handlers.
- If the ITEPA agency rules apply, the payments made to the dog-handlers must be treated as ‘earnings’ for Income Tax purposes; and
- This would require Tyler Security to apply the Agency legislation and account for the PAYE and NICs due on the payments made to the dog-handlers.
A key issue in the appeal was whether the dog-handlers personally provided their services to another person under a contract, and whether they were subject to the Supervision, Direction, or Control (SDC) of any person.
Tyler Security believed that it was not acting as an agency but rather supplying dog-detection services as a complete package to their clients and that they did not supply individuals as temporary workers or supplies for individual personal services.
Tyler Security’s business model
Tyler Security provides specialist search-detection services for its end-clients at venues and events. Under its contracts with those clients, Tyler Security agreed to supply teams of search-dog operatives and their dogs. Fees are calculated according to the number of operatives and dogs supplied, and the number of hours they work.
During an “educational due diligence meeting” held in 2020, the arrangements were described as follows:
“…Tyler provide the services of the Dog Handlers to the venues, the venues will then pay Tyler for the services and Tyler in turn pays the Dog Handlers for such services.”
The dog-handlers attended the venues personally, but did not contract directly with the end-clients. Responsibility for ensuring compliance with all relevant laws, regulations, and codes of practice rested entirely with Tyler Security.
Application of ITEPA
What happens if Section 44 applies?
- The worker is treated as an employee of the agency for Income Tax purposes, even if they are not employed by the agency in reality.
- All the money the worker receives for that work is treated as employment income from the agency, no matter who actually pays them.
(Subject to the specific exceptions in subsections 44(5) and 44(6).)
Conclusion
The central issue in the appeal – and the key to determining whether the agency legislation applied – was whether Tyler Security’s dog-handlers personally provided their services to the end-clients and on whether they were subject to (or to a right to) SDC.
Tyler Security argued that it supplied a composite service of dog-detection and security support, going beyond the provision of an individual worker. On that basis, it maintained that the services should not be classed as personally provided services and that it was supplying a packaged security solution rather than individual labour. It, therefore, contended that it was not acting as an agency.
HMRC disagreed. Their view was that the search dogs formed part of the specialist equipment operated by trained personnel, and that the effectiveness of the dog-detection service depended entirely on the handler’s work. In every engagement for which Tyler Security received payment, a dog-handler personally provided services to the end-client, accompanied by the dog. Without the handler’s presence, HMRC argued, the service could not be delivered.
The First-tier Tribunal (FTT) concluded that section 44 ITEPA does not require the worker to be obliged to provide services personally; it simply asks whether the worker did personally provide the services in practice. On the facts, the dog-detection services were wholly dependent on the handler’s work and presence.
The Tribunal also found that SDC was present – this focuses on how the work is carried out, not what the work is.
- Supervision: overseeing the worker to ensure the work is done correctly;
- Direction: giving specific instructions about how the work should be performed; and
- Control: having the authority to dictate how the work is done, even if that authority is not exercised.
For the agency rules not to apply, a business must demonstrate that the worker is not subject to SDC by anyone in the chain. The FTT found that SDC was clearly evidenced, particularly through the contract between Tyler Security and its clients, which included KPIs the handlers had to meet, site rules to follow, required training, and specific assignment instructions.
Given these findings, the FTT upheld HMRC’s Regulation 80 determination, and Tyler Security’s appeal was dismissed.
Key takeaways
The Tyler Security case reinforces the breadth of the agency legislation in sections 44–47 ITEPA and demonstrates how easily businesses can fall within its scope, even where they consider themselves to be supplying a packaged or composite service rather than individual labour.
- Workers personally providing services may trigger the agency rules, regardless of how the service is packaged;
- Evidence of SDC – through KPIs, training, site rules, or assignment instructions – can bring arrangements within ITEPA; and
- Misclassification can lead to substantial backdated tax, interest, and penalties.
How M+A Partners can help
With expert guidance, businesses can ensure they remain compliant, avoid unexpected tax liabilities, and manage intermediary arrangements more effectively. For any queries on this matter, please get in touch with our experts below.
