SHOULD A RECRUITMENT AGENCY PAY A CONTRACTOR AS A SOLE TRADER?

Paying contractors in the right way is vitally important to a recruitment agency to ensure that there is no come back or liability from HMRC. The recommended way of paying contractors is either through the agency as a PAYE candidate (where the tax and national insurance are deducted at source), or payment to an umbrella/PSC/limited company (where the director of the company assumes the liability from the agency for the statutory payments due). This way either the agency director or the director of the umbrella company are responsible for the taxes payable by the contractor.

With the changes to the travel and subsistence allowance coming in April this year, contractors may decide to try and use other methods to get paid by the agency in order to bypass the new legislation. It is advisable to continue to pay the contractors using the recommended routes above to ensure that there are no repercussions on the agency or its directors.

TBOS are asked on a regular basis by agencies if they can pay a new contractor who is classed as a sole trader/self-employed worker. The issue with paying a contractor as a sole trader/self-employed worker is that if that candidate (who is not classed as a director) decides not to declare or pay the taxes then HMRC can get the agency as the last director (in this case the agency director) who made the payment to pay the taxes instead. The taxes would be grossed up on the payment made. Therefore whenever TBOS is asked if they should pay a sole trader/self-employed worker we advise against this method to reduce the risk to the agency.

TBOS has seen the impact of paying sole trader/self-employed workers when we were speaking to a new agency a few years ago. The director explained that they had previously run a medical recruitment agency providing locums to the NHS which had to go into liquidation. The director explained that they had a number of doctors from South Africa on contract placements that were being paid as sole traders. However at the end of the contracts the doctors returned to South Africa and did not declare or pay any taxes on the funds received. HMRC upon completing a tax investigation could not find the doctors to reclaim the unpaid taxes and therefore decided that the recruitment agency director was liable for the taxes due. Unfortunately, the unpaid taxes were greater than the profit made and the agency therefore went bust in the process.

TBOS helps and advises its agencies on a daily basis to ensure that they pay their contractors correctly and risk free. For more information on how TBOS can help and advise you on how to manage your contract workers please do not hesitate to ask.