A significant tribunal ruling was made last week, which will have implications across the recruitment sector and confirms that our decision to pay the candidates we place as employees via PAYE (pay as you earn) was the right thing to do.
The ruling by the First Tier Tribunal (FTT) said former BBC Look North presenter Christina Ackroyd was affected by IR35 tax legislation; IR35 is designed to combat tax avoidance by workers supplying their services via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Such workers are called 'disguised employees' by Her Majesty's Revenue and Customs (HMRC).
At last, it seems HMRC is starting to catch up with limited company contractors who have been avoiding tax and this case may well be the first of many.
Why does the FTT ruling affect recruitment?
The directors here at 24-7 Staffing took the decision in April 2016 to pay all workers we place through our own PAYE system. This decision was an expensive option for our business, but one which we felt was the right course of action. We continue to turn away hundreds of limited company contractors who want to register with us, particularly lorry drivers, but we do so for their own protection and the protection of the clients we work with.
However, there are many recruitment agencies turning a blind eye to IR35, by allowing limited company workers to register for work when they should be on PAYE. In many instances, it suits the agencies to have limited company contractors working for them as they don’t have to pay any holiday, National Insurance or pension contributions, and therefore they make a higher margin.
Unfortunately, many candidates are not aware that they are giving up certain employment rights by working as a limited company contractor, and while it may seem they are earning more per hour, there are other hidden costs associated. These include:
- Having no holiday pay
- Needing to pay an accountant to manage tax affairs
- The cost of public liability insurance
- In the case of HGV drivers, possible drivers’ negligence insurance
- The risk of getting on the wrong side of HMRC, with a tax bill which could be backdated
How IR35 affects employers using recruitment agencies
While in the first instance HMRC may go after the worker to recover unpaid tax, it may also look to recovering it from the recruitment agency; if this recourse is unsuccessful, next in line it could be the clients for whom the limited company contractors were working.
Employers should be asking recruitment agencies what the employment status is of the workers they are using to ensure they don’t run this risk.
If you’re unsure about your status as a worker (or if you are an employer and want to check the status of your workers), then take this simple test and answer the questions through the eyes of a HMRC inspector as honestly as you can.
What should recruitment agencies do?
We’d say, follow our lead and become compliant by going 100% PAYE. To ascertain whether a candidate should be PAYE or can legitimately work as a contractor, agencies should ask three simple questions:
- Who is giving them instructions? If it’s the client, then they are likely to be under SDC (Supervision, Direction and Control). Therefore, deemed an employee rather than a contractor.
- Does the contractor have the right to substitute themselves for another worker in their employment? If no, it is likely that their status would be employee rather than a contractor.
- Does the contractor supply his own tools or equipment to complete the job (such as a vehicle in the case of a lorry driver) . Again, if the answer is no, then it is likely that the contractor should in fact be an employee.
Compliance is vitally important to us at 24-7 Staffing, which is why we made the decision two years ago to move all workers onto PAYE. The sooner HMRC enforces this legislation the better it will be in the long run for everyone involved.
For more information, or if you are currently job-seeking or want to work with an ethnical agency who value compliance, then please get in touch with a member of our team.