New case highlights risk to agencies of engaging with sole traders
The healthcare agency K5K Limited is facing a tax bill of more than a quarter of million pounds as a result of engaging agency workers as sole traders. Sole trader arrangements have increased in popularity recently with many regarding this as a potential solution to IR35. However, as per our previous article, the engagement of sole traders poses tax, status and other compliance risks, whether the engagement is direct or via an umbrella provider.
The case in question concerned tax liability under Chapter 7 of the Income Tax (earnings and pensions) Act, commonly referred to as the ‘Agency Tax Rules’. In summary, these rules place responsibility on an agency for PAYE tax and National Insurance contributions on any payments made to an individual for the performance of services. This will be the case whether the agency engages that individual directly or via a third party. The agency may avoid liability if the payment to the individual is treated as employment income by another party or where there is no supervision, direction or control present relating to the manner that the services are provided. However, agencies need to give careful consideration as to whether these circumstances apply in each case.
Outside the recruitment industry the Agency Tax Rules are not well known. Accountants and hirer clients may suggest a sole trader engagement as a viable option, without fully appreciating the implications for agencies. Agencies should therefore remain aware of the risk and the steps required to establish a defence, including having clear and robust contractual obligations in place along with processes for determining where sole trader engagement may be appropriate.
Tax liability is, however, only one of the risks associated with the engagement of sole traders. There are also significant risks associated with employment and worker status, statutory rights, and compliance. Recent years have seen employment status cases involving drivers, couriers, and plumbers, to name but a few, all of whom were classified as ‘self-employed’ yet found to have worker rights. It should also be remembered that self-employed individuals, or sole traders, are subject to the Conduct Regulations and not automatically outside of the scope of the AWR.
Getting the right advice from the right source is key. Lawspeed can help, both in terms of tax and compliance risks. Click here for details of our January seminar which will focus on the rules and risks of agency worker supply.
Theresa Mimnagh, Director at the recruitment and employment law specialist Lawspeed.
Lawspeed group corporate clients benefit from immediate up to date advice on staff engagement and related regulation; employment law, settlement terms and tribunal representation; employment status; client, IR35, PAYE, and umbrella contract templates; contract review/negotiation; self-employment and CIS contract templates; trade membership and government representation; audit and accreditation services and a state-of-the-art digital contract management platform.
Adrian, a highly experienced lawyer, founded Lawspeed in 1997. He is responsible for developing our extensive portfolio of products and services, including the widely used Lawspeed contract templates. Adrian is an expert on “recruitment law” and specialises in contracts, regulatory compliance, employment status and dispute handling. He is chair of the trade body the Association of Recruitment Consultancies, the only lawyer lead recruitment trade body in the UK. Adrian and his co-director Ravi devised Standards in Recruitment as a vehicle for helping drive up standards and compliance in the industry.
Adrian is our lead in discussions with the government over regulatory evolution. Apart from assisting with client support, Adrian’s primary role is research and development into methods of business delivery, our latest service Proterms being his most recent project. Adrian heads our IR35 lawyers team.