Debt transfer risk as Agency Worker Regulations (AWR) come into force

Debt transfer risk as Agency Worker Regulations (AWR) come into force

Influencing workers to operate Personal Service Companies (PSCs) post AWR will increase debt transfer risk

Reviews into service company providers up 71%

142 debt transfer notices issued in the past year

End users and recruiters who influence agency workers to operate via personal service companies (PSCs) to attempt to avoid the Agency Workers Regulations (AWR) may be liable for unpaid tax and national insurance (NI) if HM Revenue & Customs (HMRC) subsequently challenges those arrangements, warns giant group plc, the contractor service provider.

Figures seen by giant show that HMRC has significantly stepped up compliance activity over the past year against MSCs. The number of HMRC reviews of suspected MSCs in 2010/11 went up by 71% over those conducted in 2009/10. In addition to this, in the last tax year HMRC has issued over 140 formal transfer of debt notices to companies and their directors. In one such case an agency and its Directors are reportedly facing a £10 million transfer of debt notice from HMRC. There is very real danger if compliance is ignored.

Matthew Brown, Managing Director of giant group, comments: “The last thing HMRC wants is to lose millions of pounds in tax and NI through mass incorporations. It 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 etc) is, on average, £10,000 per limited company per annum. Just 100 workers equates to a £1 million ‘debt’ over 1 year, plus interest and up to 100% penalties, so the financial risks are very significant indeed.”

Recruiters and their directors who direct or influence agency workers to operate as PSCs could be caught under the Managed Service Companies (MSC) regulations and 3rd Party Debt Transfer legislation. The MSC ’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. Any MSC ‘debt’ can be transferred to a contractor and/or the agency and/or its directors personally if the agency directly or indirectly encouraged MSCs. 

Unfortunately uncertainty still surrounds PSC contractors with respect to AWR. Contractors are more likely to take up PSCs if they are high earners and long-term contractors. They may be outside the scope of the AWR provided they are genuinely in business on their own account and are not under the supervision and direction of the hirer.

Brown adds “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? Agencies need to be very careful if they are thinking about advising contractors to use a PSC as a way of avoiding AWR.”