AWR ‘poses MSC debt transfer risk to recruiters, clients’

Influencing temporary agency workers to use personal service companies as a way to avoid now in-force equal treatment rules could make recruitment and client companies liable under the MSC legislation, a contractor service provider claims.

Even company directors may face tax and national insurance demands under MSC debt transfer rules, if the taxman deems them to have directed or influenced a temp to a limited company in attempted avoidance of the AWR, Giant group warned.

The government says “simply putting earnings through a limited company would not in itself put individuals beyond” the AWR’s scope, but the group pointed out that officials also say that those who are genuinely in business on their own account should be.

However the “last thing” HM Revenue & Customs wants, particularly in the current climate, is to lose millions of pounds in tax and National Insurance payments through the AWR triggering a mass of incorporations.

Giant’s director Matthew Brown added: “[The Revenue] will therefore watch closely for contractors who are directed or influenced to operate through a PSC and challenge arrangements that it views as artificial”

“The tax and NI lost (due to dividends) is, on average, £10,000 per limited company per annum. Just 100 workers equates to a £1m ‘debt’ over one year, plus interest and up to 100% penalties, so the financial risks are very significant”.

Perhaps more concerning for all parties in an MSC’s contractual chain, is the rate at which HMRC compliance activity against suspected MSCs is increasing.

Pointing to official figures it has seen, Giant said the number of HMRC reviews under the MSC legislation conducted in 2010-11 was up 71% on the previous tax year, with140 formal transfer of debt notices issued in the last year alone.

The tax authority was not able to comment on the dataset at the time of writing, but it did respond to CUK’s approach by issuing some fresh guidance on the application of the debt transfer rules. But agencies (and clients) can take some reassurance from the fact that the rules come into play only in specific circumstances.

Namely - where there is an MSC; an MSC provider – ‘someone in the business of promoting or facilitating the use of companies to provide the services of individuals’, and where the MSC provider is “involved” with that MSC.

“If there is no-one else involved, [so no MSC provider involved with the company] and if all the agency is doing is ‘carrying on a business consisting only of placing individuals’… then I cannot see that the regulations apply,” argued Roger Sinclair, of legal advisory egos.

“I [also] don't see that incidentally encouraging a contractor to 'use' a company in the hope that doing so will avoid AWR - which it won't anyway, if that is the only thing that is different - exposes the agency to debt transfer risks.”

Where it does emerge, a Managed Service Company ’debt’ is 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 did pay through their own limited company.

More positively, if the contractor already owns their own limited company upon joining the agency, then such an action serves to protect the agency from the transfer of MSC debts, HMRC has said.

Still, if irrecoverable from the contractor within three months, Giant reminded that the MSC’s debt could be transferred to any other party in the contractual chain.

So, eventually, that means a recruitment business and/or its directors - personally, assuming the agency directly or indirectly encouraged the provision of the worker’s services through the MSC.

Mr Sinclair reflected: “If someone else is carrying on the business of an MSC provider – and there is an agency that ‘directly or indirectly encouraged or was actively involved in the provision by the MSC of the services of an individual,’ then there may be a problem [for the agency under the transfer of debt rules].” 

In his alert to agencies, Mr Brown preferred: “Agencies need to be very careful if they are thinking about advising contractors to use a PSC as a way of avoiding AWR. [But] it is easy for recruiters to comply with AWR.

“You simply have to ask the hirer two questions. If the temporary worker was employed by you, what would be their salary (overtime and bonus, if any), and days of holiday entitlement?”