Directors of recruitment agencies are growing increasingly concerned about the implications of non-compliancy with HMRC guidelines, in relation to the payment of self-employed and employed temporary contract workers. Matthew Partridge, senior manager with leading Service Company, Zeva discusses the issues and how to ensure compliance with current legislation.
The HMRC states that the tax treatment of services provided through a third party is governed by a piece of legislation called “IR35″. This looks at the nature of the relationship between the worker and the end client, and constructs a “notional contract” between them, of which there can be two types:
A contract for services: Where the contract has the characteristics of self- employment (subcontractor). In this case the normal tax rules apply.
A contract of service: If the contract is one of employment, then the legislation requires that the third party company pays employed levels of tax and NICs on payments to the worker.
These guidelines have made many agencies feel uneasy and pressured into employing all workers direct. In this case the workers lose their freedom of choice to choose a third party company to handle payment processes throughout the course of their employment, such as an Umbrella Company.
Furthermore, if an agency does use the services of a CIS limited company, who-in-turn uses and pays subcontractors, then the agency could be held responsible for any outstanding monies on behalf of any subcontractor, who should have originally been paid as an employee.
The HMRC is attempting to regulate an industry that is, and has been, largely unregulated. With original legislation brought in to tackle Composite Companies, whose workers were paid in dividends as shareholders, it now appears it has been reworked to force legitimate self-employed people into employment.
The legislation regarding employment agencies appears deliberately vague (as we’ve seen with IR35) rather than having a legislative base, and now indicates how the HMRC would prefer everyone to be employed.
Treating an ‘employed’ person as a ‘self-employed’ subcontractor is illegal; as is paying workers less than minimum wage, not paying full holiday allowance, allowing claims for non-existent expenses, etc.
It is, after all defrauding the Exchequer of tax and National Insurance (NI), as well as withholding statutory rights from the worker. Even if the agency isn’t the direct employer, responsibility for unpaid PAYE / NI contributions may be passed on to the directors of agencies, who use payment service companies that do break the law.
Some agencies have been known to turn a blind eye to the questionable practices of their payment companies. In a time of economic downturn the costs associated with managing ‘payment solutions’ are actually increasing, to pay larger and larger kickbacks to consultants and directors, which could possibly cost the agency, and perhaps its directors, a fair amount in the future.
However this can all be avoided by simply ensuring that your payment services supplier is not breaking the law, proving more profitable for the agency further down the line. There are a few basic rules for any Umbrella or Subcontractor, which if followed, should help agency directors sleep better at night, and protect not just them but the interests of the workers too:
• A supplier should be chosen carefully, ensuring that any HMRC compliant and responsible supplier should be able to provide proof of adhering to current legislation.
• It is vitally important that a full service contract is in place between all parties. This should be for a limited period, and a new contract agreed for each project. If this is not done automatically, it can be very cumbersome and time consuming. Ask for evidence that this is being done in full. The general rule is the more complicated the compliance procedures, the more likely it will not be done, so it is vitally important that you see proof and not just of compliant procedures but of their execution.
• Every applicant to your subcontracting company should undergo a thorough self-employment/IR35 test, before being accepted as a self employed worker by your subcontractor. Preferably use a supplier that also offers a PAYE alternative to self-employment such as umbrella, so there is less chance of ‘coaching’ by your supplier. Again ask for proof that this is being done. This has to be periodically reviewed, as a worker may be working ‘in his own right’ on one site, but his circumstances may be different on another.
• Finally, legislation cannot be side stepped. An employee has to be paid at least the minimum wage, receive holidays, be eligible for sick pay and incur expenses. There has been widespread abuse of dispensations, as dispensations can reduce a company’s reporting, however expenses must still be incurred and not assumed or invented, and proof, such as receipts, should always be requested.
Zeva is a leading Lancashire based Payment Services Company specialising in the construction, engineering, driving and IT sectors. For further information on Zeva, its products and services – go to www.zeva.co.uk.