In Direct Personnel Midlands Limited v HMRC [2019], the First Tier Tribunal decided that a recruiter did not automatically take over an employment agency’s PAYE liabilities when it paid the agency’s staff directly. The payments made also offset the agency’s charges for VAT.

  • Direct Personnel Midlands (DPM) acts as a middleman between an employment agency and the end-clients. It recruits blue-collar workers for end-clients, mainly working in manufacturing industries.
  • It worked with an employment agency, ‘Newbain’, who employed workers, paid them and operated PAYE and NICs. Newbain supplied the workers via DPM to the end-client. It charged DPM for the cost of the workers plus its fee. DPM invoiced the end-client, adding its own fee.
  • This supply chain model had worked successfully for several years. DPM knew Newbain's staff and when Newbain claimed it had suffered banking fraud, it believed this. As a result of a frozen bank account, Newbain could not pay its workers that week. In order to maintain the supply chain and to serve the end-client, DPM offered to pay the workers their net pay. 
  • What was thought to be a temporary glitch continued for six months. During this time the workers continued to be supplied up the chain. After a couple of months, Newbain closed and another company ‘MAP’ took over in its place. MAP took over all of Newbain’s employment contracts and was run by the same staff.
  • Time passed and DPM became suspicious of MAP's lack of explanations and terminated their agreement. It then started to work with a different employment agency.
  • Newbain went bust and MAP eventually disappeared without paying HMRC the PAYE/NICs deducted.
  • HMRC were suspicious and investigated labour supply chain fraud. It issued Regulation 80 and corresponding Social Security determinations asserting that Newbain’s PAYE/NICs liabilities had transferred to DPM which had become the employer when it started paying the temps their net pay.
  • DPM offset the net pay paid against Newbain’s, and then MAP's, monthly invoiced charges. These continued to be issued, as it continued running the payroll and engaging workers.
  • HMRC also disallowed the offset for input VAT under the six-month input VAT rule. They claimed that there was no supply by Newbain and they blocked DPM’s input VAT recovery.
  • HMRC estimated PAYE and NICs based on the amounts charged to DPM, rather than working from payroll reports.
  • Total tax assessed for PAYE and VAT was in excess of £400k. DPM lodged three appeals, which were all heard together due to the shared facts of each.

The FTT found:

HMRC had treated Newbain as the employer originally. There were no changes to any employment contracts when MAP took over and all the workers remained its employees. Newbain and MAP must have continued to be the employer. It concluded that:

  • DPM was not an employer for PAYE purposes, it was merely making payments on behalf of the actual employer.
  • DPM was in the same position as Oriel in R (on the application of Oriel Support Ltd) v HMRC [2009] EWCA Civ 401, in which Moses LJ stated as follows at [19]:

“[19] In the instant case, where Oriel makes a payment, it does so, as Mr Walters accepted, as an intermediary on behalf of the labour provider. The payment, therefore, is to be treated, for the purposes of PAYE, as a payment of income by the labour provider, but the labour provider is not required to deduct tax and account for it by virtue of the operation of s.710, which I need not read into the judgment and the operation of s.687(2). The payment by Oriel, the intermediary, discharges the liability of the labour provider, but it is important to note that s.687 does not expand the definition of employer on whom the liability to deduct tax is placed; it merely enables machinery for an intermediary such as Oriel to discharge the liability of the labour provider.”

The effect of this finding is that DPM is not liable for PAYE as it was not the workers’ employer.

In terms of VAT:

  • As there was no change in the supply chain, the employer's supply of services for VAT continued to be supplies of staff and payroll services.
  • DPM was entitled to offset the payments it made on the employer’s behalf against its invoices and it was entitled to reclaim input VAT charged on those invoices.


  • An unusual set of circumstances made HMRC naturally suspicious. HMRC did not argue that there was a sham and the evidence demonstrated a genuine labour supply chain. 
  • HMRC is currently consulting on new rules which allow a transfer of PAYE/NICs liabilities under the off-payroll working rules. 

Useful guides

PAYE Regulation 80 & NICs determinations
When can HMRC assess an employer or an employee for unpaid PAYE and NICs? Who is assessed and what are the conditions?

VAT Toolkit
Our take on HMRC's VAT Toolkit comes with lots more tips.

What constitutes a valid VAT invoice?
What is a valid VAT invoice? Can you claim back VAT if the invoice is in someone else's name?

VAT: Place Of Supply of services
The Place Of Supply (POS) of a service determines whether the supply is within the scope of UK VAT and whether VAT is payable on that supply.

External links

Direct Personnel Midlands Limited v HMRC [2019] TC/2017/08975 TC/2018/04954 TC/2019/01125