Working with ProCorporate to reduce your risks.
There is now a wide range of legislation that employment businesses have to be aware of when paying their temporary workers.
Much is to do with tax, but other legislation which deals with employment businesses' responsibilities as an employer can overlap.
ProCorporate have extensive experience in helping recruitment agencies stay competitive and compliant.
We can advise on which methods you can pay your workers and some of the traps to avoid:
Paying temporary workers
Should I pay self-employed contractors?
Contractors will often be in a better position if they are self-employed. They will typically pay less tax, although the main motivation is usually that they will receive gross funds without having to pay their tax immediately.
The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) s44 states in relation to the ‘treatment of workers supplied by agencies’ that:
“all remuneration .. is to be treated .. as earnings from that of employment.” (ie. subject to PAYE and NIC).
Even if for some reason HMRC agree that you are not an agency for the purposes of this legislation (which is extremely unlikely), then they can still review the worker’s employment status. Employment status is defined by the working conditions of an individual contract or assignment, not the worker’s previous status. If your local PAYE inspector decides one of your ‘self-employed’ workers is actually your employee, HMRC will probably charge you PAYE/NIC costs of around 45% of the amount that you have paid the worker, plus interest and penalties.
HMRC are not the only ones who can challenge employment status. Workers often fail to set aside sufficient funds to pay their future tax and NIC and decide to challenge their own employment status.
This also happens when there are issues around redundancy, sick pay, holiday pay or accidents. There is growing evidence that accountants are now advising workers, who are unable to cover their end-of-year tax bill, to claim against their agency, demanding they are treated as employees.
Is it safe to use an intermediary company?
Sometimes contractors work as self-employed through an intermediary company, so agencies receive invoices from a limited company. This initially looks much safer for agencies, however these self-employed intermediaries are almost certainly caught by the 2007 ‘Managed Service Company’ (MSC) legislation. This means that not only would workers paid through MSCs be liable to be taxed as employees, but that agencies could be liable for unpaid tax where HMRC cannot collect the tax from the worker or the MSC.
But my workers are CIS...
The MSC problem is often linked to the HMRC ‘Construction Industry Scheme’ (CIS) – the MSC legislation applies to all service work, whether in construction or not. HMRC have already stated that they are focusing on ‘false’ self-employment in construction. One construction company is reportedly facing a bill of several million pounds for unpaid PAYE and NIC going back several years.
Worker's own Limited Company
Where workers use their own limited company, these may or may not be caught as 'Managed Service Companies'. This is not usually a problem for agencies as long as they have not been involved in its promotion or induced the worker to set-up their company in any way. In other words, if a worker comes to an agency with their limited company already in place, there should be very little risk for the agency.
Running a company can be a burden for workers and there is only ever a tax advantage when the worker passes an 'in business' test. This would mean showing that their work has attributes such as:
- a right to substitute themselves with another worker
- a high degree of self-direction over the work they do
- an element of risk (eg. paid by the job, rather than by the hour).
Umbrella companies can provide a compliant approach for agencies - depending on the umbrella company used. One difficulty can be monitoring the compliance of all the various umbrella companies in use. ProCorporate operate two industry-leading umbrella companies
and offer agencies significant rewards for sole-supplier agreements.
Agency's own payroll
Agencies can maintain full control and reduce administration by outsourcing their own payroll. ProCorporate specialise in running payroll for recruitment agencies
and understand the particular issues for recruiters and temporary workers.