Maybe my wife's experience may shed some light. Late 2007 she got a job through Reed for a few months. Though the employer wanted a contractor, Reed acted as the employment agent and recruited the missus as a PAYE employee.
She was in admin and later found out that the actual company was paying around Â£6.40/hr and as a PAYE she was earning Â£6/hr
Though she could have contracted directly, the actual employer preferred using Reed as they guarantee to fill out that position anytime my wife left!
She did not have any holidays set apart as a PAYE. Further, she was taxed for the amount she received. So I guess Reed paid their own taxes for the marginial profit they made and my wife was taxed the usual rates.
A few months later, on constant performance and persuation, the employer hired her full time, paid her the complete Â£6.4/hr along with a nice benefits package and bypassed Reed
From her expereince and in her field, either contracting directly or being a perm full time sounded much better than being employed by the recrutiment agent. Of course, it may be a lot different in case of IT roles with much higher hourly rates!
Hope this helps