By John Brazier, Managing Director, Professional Contractors Group

Agencies which send freelancers or contractors into a client organisation have to satisfy two parties: the client and the contractor. Agencies that are found wanting by contractors may, over time, find it harder to attract able contractors, and therefore harder to meet client's needs.

PCG’s online forums contain constant discussions of different agencies, and agency-client combinations: contractors compare notes on contract terms, customer service, the efficiency with which payment is made and so on. It is not uncommon for contractors to decide consciously that they will not use a particular agency to find work, owing to a bad experience in the past.

Clients, agencies and contractors must also negotiate several difficult legal obstacles: the Agency Regulations, IR35, employment law and, most recently, the Managed Service Company tax rules. This article will give an overview of best practice in each of these areas.

Firstly, let’s look at IR35 and employment law: the key thing to understand here is that clients’ interests and contractors’ interests coincide quite closely. Contractors want to work outside IR35, and clients want to be sure that they will not be found to owe employment rights to contractors if the relationship goes wrong.

Establishing a proper commercial relationship meets both of these needs: with a proper commercial contract, the contractor cannot be found to be an employee, while at the same time a proper commercial contract will take the contractor outside IR35.

So, what are the “do”s and “don’t”s of establishing a commercial relationship with your contractors? They rest on the definition of a “contract of service” in common law – this is the legal term for an employment contract, and it’s what we want to avoid. There are three key criteria: personal service; direction and control; and mutuality of obligation. If the contract contains all three of these elements, it is IR35 caught and creates a risk of employment rights: but if you can keep at least one, but preferably more, of these elements out of the contract, the client and contractor will both be safe.

In practice, this means: where possible, ensure the contractor can send a substitute if necessary, ideally without the client having a right of veto; ensure the client cannot absolutely direct the contractor in how they work – this includes time and place; and ensure there is no ongoing mutual obligation between the client and the contractor. In practical terms, this is best done by setting up the contract around key deliverables, rather than simply engaging them to provide services for a given period of time.

A well-informed contractor (and some are better-informed than others!) may ask for changes to the contract they are offered in order to incorporate these points: it is a good idea to agree to these, from both the contractor’s perspective and the client’s. Ideally, you should get your standard contracts reviewed so that they incorporate these points in the first place, if they do not already.

There are some further essential points, without which the relationship will not be properly commercial. Firstly, the contract must reflect the way the client and contractor work together in practice: if the contract is just a sham and in practice the contractor is working in the same way as an employee, HM Revenue and Customs or an employment tribunal will just look straight past the agreed contract and draw up an “implied contract” based on circumstances on the ground.

Secondly, the key commercial terms must be reflected in both your contract with the client and your contract with the contractor: if the “upper” and “lower” contracts do not match, HMRC or an employment tribunal could pick whichever one points more strongly towards employment. This is the agency’s responsibility, as the agency is the only party that sees both contracts.

And thirdly, whatever you do, don’t ever terminate contractors at 48 weeks simply to “avoid employment rights”. If your contract is commercially sound, early termination is utterly pointless: you can keep the relationship going for as long as you like with no risk of employment rights, as long as you have got the terms of the relationship right. Termination will also increase the costs for the client, who will have to find a load of new contractors and get them up to speed. Above all, it may seem to be an admission that, actually, the contractor was an employee after all. It is a deeply counter-productive practice, as well as being a commercial and legal nonsense.

All of this assumes that you are dealing with contractors who run their own limited companies. Under ss44-47 ITEPA 2003 (sometimes called “s134” by contractors, after its previous incarnation in an older piece of legislation), it is difficult for agencies to deal with sole traders without putting them through PAYE: although it is not impossible to do this, most contractors accept that it is often not worthwhile for agencies to try, and so are happy to operate limited companies.

A limited company is now one of two principal options for contractors: the Managed Service Company tax rules have eliminated “composite” companies and other variants from the scene, although PAYE umbrella companies remain an option. Under the MSC rules, agencies can, in theory, be forced to pay tax debts left by contractors: but this can only happen if the contractor has been using an MSC, and if the agency has been instrumental in setting it up with them.

So there are two key things to note regarding the MSC rules. Firstly, HMRC have stated explicitly that if a contractor has a limited company before they approach an agency, they will not even consider applying the debt transfer rules to the agency: so if a contractor has a company when they come to you, you do not need to ask them any questions about it.

It is best practice not to send contractors extensive questionnaires or ask them to sign undertakings that they are not using an MSC, therefore: they are not necessary. It is also a good idea to avoid using the term “Personal Service Company”: it has no basis in law.

Secondly, an agency is only at risk of a debt transfer if it is “actively involved” with using MSC contractors. If you need to direct contractors without companies to a provider, point them towards a PAYE Umbrella or a limited company provider that definitely does not provide MSCs.

Finally, there are best practice issues around the Conduct of Employment Agencies and Employment Business Regulations as well. Under the regs, it is unlawful for an agency to pressure a contractor to opt in or opt out: increasingly, clients seem to be trying to pressure contractors one way or the other as well, and while this is not technically unlawful it is clearly against the spirit of the regulations. Best practice would be to point this out to clients.

Engaging contractors is straightforward if you set up proper commercial relationships and keep yourself informed on regulatory issues like MSCs. To help you in this, PCG provides an Approved Contract scheme that provides a kitemark for sound contracts, advice on MSCs, and fully compliant PAYE umbrella and limited company solutions, PCG (QU) and PCG OneStop.

free tax surgery at t-mobile

Over recent years, TAC Europe has built a strong reputation for the benefits and services offered to our highly valued contracting consultants, like YOU. Among these benefits is the availability of high quality tax advice from our preferred provider, Nyman Linden Chartered Accountants.

As you know, there is continued Treasury and HMRC pressure on the contracting market and still a surfeit of unregulated and potentially lethal tax schemes being offered to contractors. Conversely, there are also some legal tax solutions but not suitable for some contractors – for example:

1. Operating through an umbrella rather than a much more tax efficient personal service company

2. Using the services of an accountant who may not be giving you the level of service appropriate to your individual situation

Both TAC Europe and our highly valued contracting consultants face challenging times. Contractors have to consider issues such as “disguised employment”, “shifting income”, “capital gains tax changes”, and so on. For us, and indeed, indirectly for our clients, there are many issues surrounding “Managed Service Company” compliance and new Money Laundering Regulations.

To enhance TAC Europe’s 2008 Contractor Care programme, we have enlisted the support of T-Mobile and Nyman Linden to provide a monthly ‘Tax Surgery’ at T-Mobile. T-Mobile is providing on-site office space and appropriate refreshments whilst Nyman Linden runs the ‘Tax Surgery’.

Nyman Linden is one of the UK's leading, regulated, accountancy firms for contracting consultants and freelancers and is the preferred accountancy service provider to TAC Europe and our other recruitment agencies. Its fixed fee and comprehensive, limited company package includes completion of accounts, payroll bureau, dividends, corporation tax computations, personal taxation and all company and personal returns. The firm aspires to offer all its contracting consultants the highest legally achievable net retention income whilst providing the reassurance of compliance and safety for their agencies and clients.

To find out how TAC Europe and Nyman Linden can set up a similar free tax surgery at your premises please contact Quality & Compliance Manager, Colin Teesdale on 01256 365783 or e-mail colin.teesdale@taceurope.com