Fitting the financials back together again

17 March 2010 | By Colin Cottell

Choosing who to do business with, or perhaps more important who not to do business with, has never been easy for recruiters. So last month's demise of umbrella/workforce management company Albany, which has left contractors and recruiters unsure if they will ever see the money owed to them, has only served to heighten concerns about selecting the right intermediaries.

Accountancy services provider JSA's entry into a voluntary agreement to pay back taxes will have done nothing to assuage recruiters' fears.

"People are jumpy," says Marc Morris, head of sales and marketing at contractor accountancy services provider 1st Option Consulting. Sunil Duggin, a director at IT recruiter JustIT, spells out many recruiters' concerns. "We want to know the managed service provider is not going to go bust, and we want the contractor to be paid." And this has been compounded by recruiters' fear of giving any advice to agencies on their choice of service providers lest they end up being forced to pay unpaid tax and National Insurance under the debt transfer provisions of the managed service company legislation.

"For the last couple of years, it's been a case of 'don't look, don't ask, don't get involved'," says John Chaplin, a partner at KPMG.

And not only that, according to Kevin Barrow, a partner at law firm Osborne Clark, "there are also reputational dangers for recruiters who use intermediaries that go bust, particularly when their agency workers are left unpaid".

What should recruiters do?

Phillip Venn, sales director of contracting services provider Liquid Friday, recommends that recruiters do credit checks on umbrellas/payroll companies. "This gives it some comfort that they are not strapped for cash," he says.

And he advises recruiters to be particularly wary of doing business with umbrellas or payroll companies that offer terms to agencies -- by paying the agency's workers but not asking the agency to pay them [the payroll company] back, say for 30 days.

This can indicate they use invoice discount finance -- something which, he argues, a well-run umbrella shouldn't need because they are simultaneously both getting money in from recruiters as well as paying it out.

With so many providers to choose from in the UK "it would seem careless to risk using a company reliant on funding that should be cash positive", he says.

To mitigate such risks, Duggin says that recently when deciding whether to push a contractor towards a particular service provider for the first time, they used the services of APSCo (the Association of Professional Staffing Companies) who ran a compliance check and checked its financial background. On another occasion he asked another recruiter for a recommendation.

Recruiters could, of course, base their decisions on the plethora of accreditation schemes, many promising that they are HM Revenue & Customs (HMRC) compliant.

However, Venn warns recruiters to be wary of such schemes. "Some providers claim they have HMRC approval, but there is no such thing. HMRC has never given approval for any scheme," he told Recruiter.

He says the best safeguard is for providers to allow recruiters visit them and check them out for themselves. His company has an arrangement with Randstad CPE, and six or seven other large recruiters to do this on an annual basis, he adds.

During these visits, which typically last about three hours, "the agencies carry out an audit of our internal systems", Hillier explains. This might involve checking that the company has proper procedures to verify contractors' IDs and their right to work in the UK, or a review of RACS Group's expenses policy. "They also meet the staff and ask them questions," adds Hillier.

However, Stuart Davis, chairman of the Service Providers Association [member companies: giant, Parasol and Brookson] argues that this is not a good idea because recruiters are not qualified to carry out such checks.

Davis recommends SPA's own code of conduct, due to be published after 6 April. Developed in conjunction with HMRC, umbrellas and providers of services to limited companies who wish to sign-up will undergo walk-through and onsite tests from a 'big four' accountant. The cost is £7,500 for membership of the SPA, plus independent onsite tests of £4,000 for one service offering and £2,000 for a second service offering. "The code is about saying what we do and doing what we say," says Davis.

Standard accreditation?
KPMG's Chaplin says that in an ideal world all the accreditation agencies (Professional Passport and the Association of Employment Management Companies [AEMC] are widely used examples) would get together and thrash out a standard compliance model, which would then be published free. However, he says the reality is that is not going to happen.

And he warns agencies against putting too much faith in the various badges of accreditation that appear on providers' websites. "Some of these accreditation schemes don't even involve visit to providers' premises or interviews of their staff, and that makes them worthless," he says.

"Until people who choose third-party providers look beyond the badge, it's not going to change," Chaplin adds.

RACS Group's Hillier warns recruiters to be particularly vigilant when it comes to expenses paid to contractors.

"In an effort to deal with expenses abuse, HMRC is asking for justification that expenses have actually been incurred, so it's important that umbrellas actively encourage contractors to hold receipts or to hold them on behalf of their contractors," he explains.

Hillier says it is his company's policy to offer contractors, who may go to recruiters for advice, a range of options: umbrella, payroll or limited company.

Hillier is also working on the idea of a ring-fenced bank account into which contractors' tax and NI would be paid. Similar to clients' accounts, used by solicitors, this would reduce the risk of intermediaries using the money for other purposes.

1st Option's Morris says agencies that have such concerns should consider recommending limited company service providers. "With the limited company option, the money goes straight into the contractor's bank account and doesn't pass through a third party [an umbrella]."

That said, he emphasises that contractors' individual circumstances are key. "If it's a highly paid contractor, who wants a tax-efficient solution, then a limited company option might be best, but if it's a three-month contract, it's probably not worth while setting up a limited company," he says.

Louis Paes, global head of sales and marketing at international contractor services company Access Financial Services, warns recruiters to be wary of doing business with umbrellas and payroll companies that promise unusually high take-home pay rates to contractors. He says that take-home pay of 70-75% of earnings would be considered normal in much of Europe. "If it seems good to be true then it probably is, and the company is less likely to be compliant," he warns.

Beware hidden charges
Recruiters should also look out for hidden charges, he says. While his company charges contractors €550 (£493) a month for everything, some companies say they charge €250-350, but then charge on top for services, such as accountancy and payroll services. "Contractors are going to be very unhappy with the agency when they discover this," he says.

And where contractors are working abroad, he emphasises the importance of recruiters partnering with firms that are compliant in those particular countries. In the Netherlands, for example, the system of chain law means that everyone in the supply chain: contractor and agency can be fined if taxes and social insurance costs are not paid correctly, he warns.

Hillier agrees that using offshore umbrellas can be "particularly risky". Even though a contractor pays the right tax, "HMRC may not be able to get the money from the offshore provider, leading to the possibility that the agency may be hit by debt transfer", he says.

How does HMRC's position on debt transfer affect recruiters?
Some recruiters fear that providing contractors with a preferred supplier list (PSL) of intermediates could trigger debt transfer, with the agency becoming liable for any unpaid tax and NI should the intermediary fail to collect and pay it over correctly.

However, Kevin Barrow, a partner at law firm Osborne Clark, says these fears are exaggerated.

"Referral fees from payment intermediaries to staffing companies might give rise to concerns in this area, but the mere passing, in good faith, of the names of a vetted preferred supplier list to prospective contract workers and umbrella workers would not generally cause the staffing company any problem."

Debt transfer will only occur under specific circumstances says Barrow.

"Tax debt transfer under the managed service company regime will not apply except where the staffing company has directly or indirectly encouraged the worker to use that payment intermediary or be actively involved in the arrangement. It will not apply to workers properly employed by umbrella companies."

That said, he adds: "Where staffing companies have taken sensible steps to check that the payment intermediary is making such deductions as are required in respect of tax and NICs, and carried out reasonable credit checks, there should be no problem for them."