 HM Revenue & Customs has come under attack for not giving clear guidance to recruitment agencies on their liability for taxes not paid by contractors working through them, under proposed new legislation.
HMRC is pressing ahead with plans to make agencies liable when contractors working through managed services companies (notably composite companies) do not pay the right amount of tax or National Insurance Contributions (NICs) and cannot be pursued for the debt, due to lack of funds or other reasons.
HMRC has issued further guidance on the subject and says that composite companies "are almost invariably disguising employment" (Recruiter, 24 January).
Operators of composite schemes, says HMRC, will often claim tax relief on travel, to which they are not entitled.
HMRC estimates that the number of workers in such schemes has grown to at least 240,000 in 2005-06, from around 65,000 in 2002-03. They are more likely to work in IT and construction.
The government is looking to change the law so that that those working through such companies will pay tax and NICs at the same level as other employees.
For issues related to the treatment of composite companies themselves, the deadline for consultation is 2 March. The legislation is set to take effect on 6 April. The deadline for consultation on the issue of tax recovery from "appropriate third parties" (this includes recruitment agencies), is 30 April.
Many contractors may switch from composites to the standard Pay As You Earn system for employees. Others may turn to a personal service company (PSC), a structure not being targeted by HMRC. But they may still essentially be composites, working through the same composite provider company.
One defence for agencies against tax liability is if they did not know, or could not have reasonably been expected to know, that they were dealing with a composite company.
Kevin Barrow, partner at law firm Blake Lapthorn Tarlo Lyons, said it was difficult to determine what is meant by "could not reasonably be expected to know".
Anne Fairweather, external relations manager at the Recruitment and Employment Confederation, said: "If agencies are encouraged to know as little as possible about contractors' tax situations, that's not the best way for the Treasury to ensure they collect their money."
Barrow added: "Given that (agencies) have been given no guidance as to what tax status reviews would be necessary to ensure they are not liable for debt transfer, they can hardly be blamed for taking this approach." |
