Crucially, the judgment clarified that even if an agency reclassified its workers as employees for PAYE purposes following the 2014 legislative changes, this would not automatically exclude payments made to the agency by a CIS contractor from the scope of (the?) CIS. The decision highlighted that the definition of employment status is primarily relevant to the employer and not necessarily to the company utilising the agency workers – and that CIS obligations may still apply.

The ruling underscores the complexity of CIS regulations, particularly in interpreting employment status versus subcontractor classification. Although the case focused on whether payments by a contractor to labour agencies fall within the CIS, or if the workers could be treated as employees by the contractor, it also highlighted how HMRC applies different interpretations across tax regimes – what qualifies as employment for one tax may not for another.

This inconsistency is especially problematic for labour agencies and contractors operating under CIS. The Court found that even though the labour agency treated the workers as employees and operated PAYE and National Insurance Contributions (NICs), the company paying the agency was still required to treat them as subcontractors under CIS – creating a confusing overlap between employment law and CIS rules.

The case illustrates how HMRC has not streamlined CIS but has instead continued to allow numerous exceptions. To further complicate matters, agency workers are treated differently under CIS, VAT, and payroll rules. This fragmented approach increases the risk of non-compliance and places a significant administrative burden on labour agencies and contractors alike.

In conclusion, the Harbon Recruit Ltd ruling reinforces that CIS remains a highly complex area, with specialised intricacies that require careful navigation. Businesses engaging agency workers in construction should seek expert advice to ensure compliance across all relevant tax regimes.

Would you like to know more?

Blick Rothenberg has a dedicated CIS team and is available to support businesses navigating these challenges. If you would like to find out more or have any questions, please contact your usual Blick Rothenberg contact, or Michaela using the form below.