Agencies: Suffocating under the weight of new regulation?

With recent and forthcoming legislative changes affecting employment intermediaries, many recruitment agencies are having to significantly change the way they work in order to remain compliant.

Alongside older laws such as the Managed Service Companies (MSC) Legislation (2007) and The Agency Workers Regulations (2010), agencies now need to get their head around fresh legislation.

April 2015 saw the introduction of new reporting requirements for employment intermediaries, while the Finance Bill 2016 will see new rules come into force this April removing travel and subsistence relief for contractors working through employment intermediaries. All of these have an impact on the working practices of recruitment agencies.

If you are running a recruitment agency you need to thoroughly understand all of this legislation – and your resulting responsibilities – in order to ensure you continue to operate within the law. As accountants and tax advisers, we have in-depth industry knowledge in this area, with a specific understanding of the laws impacting recruitment agencies and how they can operate in order to follow HMRC rules to the letter.

Here we’ve put together a helpful overview of some of the key laws that employment intermediaries need to be aware of, with the main spotlight on recent and forthcoming legislative changes.

Older legislation

Most employment agencies will already be aware of the Managed Service Companies (MSC) Legislation 2007 and The Agency Workers Regulations (AWR) 2010.

Managed Service Companies (MSC) Legislation 2007

MSCs are company structures in which contractors are placed into groups of shareholders in a corporation owned and run by the service provider. Historically, this delivered the same tax benefits to contractors as they would have enjoyed if they were working through a limited company – but without overall responsibility. Basically, they were schemes to enable contractors to avoid paying employed levels of tax and NICs.

In 2007, however, HMRC introduced legislation to remove these tax advantages – forcing the MSC to operate Pay As You Earn (PAYE) and deduct tax and Class 1 NICs on the income received by workers within the MSC. The rules on tax relief for travel expenses also became the same as for other employed workers.

As a result of this change in the law, recruitment agencies must avoid directing work seekers to an intermediary which is an MSC – or they could risk exposing their agency to potential “transfer of debt”. An MSC debt represents the difference between what the company and worker would have paid in tax and NI if all the earnings had been subject to employment PAYE taxes, and what they actually paid. If this debt is not recovered from the contractor within three months, the MSC’s debt could be transferred to any other party in the contractual chain. And that could include your recruitment business if you directly or indirectly encouraged the provision of the worker’s services through the MSC.

The Agency Workers Regulations (AWR) 2010

These regulations give temporary agency workers the same basic rights (after 12 weeks in the same assignment) as those on permanent contracts of employment in a comparable role – including equal treatment in terms of duration of working time, overtime, breaks, rest periods, night work, holidays, public holidays and pay.

Agency workers can use the AWR if they feel that their right to equal treatment has been breached.

Recruitment agencies need to thoroughly check every contract that they sign with a hirer in case the hirer has inserted indemnity clauses that would enable them to pass all liabilities back to the recruitment company in the event of an agency worker making a claim. You also need to make sure that all workers on your books have a contractual obligation to directly inform you of any shortcomings or inequalities as soon as they become aware of them.

April 2015: New reporting legislation

HMRC has acknowledged that employment agencies deliver a valuable service to UK businesses, but also points out that some of these intermediaries have helped to create “false self-employment” to reduce tax liabilities, or have abused offshore working. To tackle this, HMRC introduced new intermediaries legislation in April 2015 which aims to ensure the correct amount of tax and National Insurance is paid by people who work through intermediaries.

The Income Tax (Pay As You Earn) (Amendment No. 2) Regulations 2015 make intermediaries such as recruitment agencies provide details of the workers they supply, and the payments they have made to those workers, where they didn’t operate Pay As You Earn (PAYE).  The report has to to include a reason why they didn’t operate PAYE.

As the recruitment agent, you need to upload and send HMRC a report at least once every three months, using an online service. This requirement includes overseas workers who have to pay tax in the UK, and payments where the worker is working in the UK or working temporarily abroad.

There is no need to include details of workers who don’t need to pay tax in the UK, or who are your own employees. The only other exemptions are if you:

• supply workers’ services at sea in the oil and gas industry wholly on the UK continental shelf;
• do not provide more than one worker’s services to a client, or make one or more payments for services for an entire year; or
• tell HMRC you are no longer an employment intermediary.

Remember: you don’t have to include payment details where they have already been included as part of a PAYE Real Time Information (RTI) submission by any other organisation.

One-person limited companies, or personal service companies, that only supply a client with one worker, don’t have to send reports to HMRC. If the worker is supplied through an intermediary they will be included in the report sent to HMRC by the intermediary that has the contract with the end client. If, on the other hand, a personal service company supplies more than one worker, it will be acting as an “intermediary” and will therefore have to send reports.

If your reports are late, you may receive a penalty: ￡250 for a first offence; ￡500 for a second offence; and ￡1,000 for third and later offences (although if there are 12 months or more between offences, you will only be charged ￡250 for the first offence in the new 12-month period). If the reports are incomplete or incorrect, you could face manual penalties, which are applied on a case-by-case basis. You can use the online service to check your report for errors.

Protect yourself further by making sure you hang on to information, records or documents that back up the details you sent to HMRC –  for at least 3 years after the end of the tax year that they relate to. This is particularly important for any documents that contain evidence of why you didn’t operate PAYE on the worker’s payments.

April 2016: New rules on tax relief for travel and subsistence

From 6th April 2016 onwards, any worker who is employed through an employment intermediary – such as an umbrella company or recruitment agency – and who is also under the “SDC” of their end-client – will no longer be eligible to claim for travel and subsistence costs as expenses.

As the recruitment agency, you could potentially be liable for a contractor’s unpaid tax if you are incorrectly led to believe that supervision, direction or control (SDC) does not apply to that worker – and therefore the contractor receives T&S expenses tax-free.

As HMRC states: “Transfer liability for any debt resulting from knowingly failing to apply the correct rules for travel and subsistence to be held, jointly and severally, by the employment intermediary and the director of the employment intermediary. Where the employment intermediary can show it has been misled by a fraudulent document, produced by another relevant party, then the debt will be transferred to that party.”

Worried about compliance?

If you are not confident that you understand all of the implications of these legislative changes – and many recruitment agencies will readily admit they are not – it is vital to seek out the advice of an expert accountant with in-depth knowledge of the contractor market, and the responsibilities of employment intermediaries. There may be certain considerations you need to make when you create new contracts, for example.

Rather than taking time out of your core business to try to navigate the legal framework by yourself, it can make financial and practical sense to find a specialist accountant and tax advisor like Acconomy. They can review your compliance in detail, and offer guidance and advice to make sure you follow HMRC’s guidelines to the letter.