We’ve already looked at the new legislation regarding false self-employment and how it could affect contractors but we thought we’d also give an insight into the potential impact on those recruitment agencies that will now have to deal with worker compliance.
As we said previously:
“The legislation HMRC plans to put in place will implement a new way to check up on sole traders and contractors. The plans mean that the matter of compliance passes hands to the recruitment agency rather than the intermediary (as mentioned above); this is because the agencies converse directly with clients and have more influence over how the worker is paid.”
How a recruitment firm is affected depends entirely on their interaction with contractors, freelancers and the self-employed. Effectively, recruitment agencies placing contractors onto assignments will now be responsible for compliance matters relating to the tax and NI contributions made by their freelancers and contractors. Agencies will now have to be more vigilant when putting contractors in for client work and will have to consider various criteria in order to remain compliant. First, will the worker be under supervision, control or direction as to the way they work? Is the worker providing their services personally? Is the worker remunerated for providing their services? (one man limited companies are exempt) Finally, is the pay already taxed as employment income?
Here’s a more in-depth look at the criteria from Brookson:
Is the worker subject to (or does the client have the right of) control, supervision or direction as to the manner in which duties are carried out (this test is not defined in legislation and has very little case law interpreting it and so is hard to disprove). HMRC’s opening position is that all workers will be subject to control and it is the responsibility of the recruitment agency to prove otherwise.
Is the worker providing their services personally (this will always be the case).
Is the worker remunerated as a consequence of providing their services (this applies if the individual receives payment directly linked to the work they do). HMRC have confirmed that one man limited companies (PSCs) are excluded from this legislation providing the worker is a director and or shareholder of the company and remunerates themself by way of salary and/or dividends.
Is the remuneration not already taxed as employment income (this means that if the worker is employed by the agency or an umbrella company and their pay is subject to PAYE then the legislation will not apply).
So, if all of these conditions are met by the recruitment agency then they must take control of deducting tax and paying National Insurance for all of the payments for their worker’s services. Also to be aware of is the proposed statutory returns and record keeping requirement which needed to be in place since April 6th 2014, though the first return is not to be made until November 1st 2014.
HMRC will be challenging agencies which continue to use self-employment providers who claim to have circumvented legislation by using Managed service company legislation.
To sum up, Recruitment agencies will need to be aware how their contract workers are being paid, which will require vigilant monitoring. This will make preferred supplier lists even more important to them; so they understand who they are working with.
Those that remain risk free for the recruitment agency in terms of tax and National Insurance liability are contractors employed directly by the agency and paid by PAYE, those employed by a compliant umbrella company that pays them employment income and also those engaged via their own limited company which pays them a salary.
If the contractor is in contact with anyone in the supply chain on a contract for their services then recruitment agencies really need to consider the action they will take as in this situation they would be liable for PAYE if HMRC’s assumption that the worker is controlled cannot be disproven.