Contractors could sue recruitment agencies for mis-selling finance packages, an industry expert has warned.

Eugene Lantry, chief executive of recruitment finance specialist Charterhouse Group, warned that it is only a matter of time before a disgruntled contractor starts legal action against an agency for selling an inappropriate finance package.

Some IT personnel can work through PAYE arrangements, rather than through composite companies designed to dodge the infamous IR35 tax.

Agencies need to ensure they are giving contractors the correct tax advice when they sign them up.

“Don’t think that contractors don’t think about this. The contractors at the upper end of the market are well-educated on these matters and they want their affairs conducted properly,” said Lantry.

“They don’t want somebody coming back to them saying they owe a lot of money.”

Caroline Greaves, operations manager at IT recruiter Interquest Group, says a major problem for agencies is getting contractors and clients to agree on terms.

Clients often insist on employing a particular person, but one of the major tests as to whether the IR35 tax applies is substitution. If a worker can be replaced by another, he or she usually falls outside the tax.

“A lot of clients want to employ that person – they are not really looking for the right to substitute them,” said Greaves.

“The whole IR35 issue is especially important in the IT sector. It is very important to our candidates as most of them want to fall outside it – it is vital to get contracts spot-on with clients and candidates.”