Recruiters need to review their compliance practices after reports that a recruitment agency and its director are facing a £10m Transfer of Debt notice from HMRC under Managed Service Company legislation, according to The Freelancer and Contractor Services Association (FCSA).

Under the legislation, third parties including recruiters or their individual officers and directors can have unpaid tax debts from individual contractor limited companies transferred to them where they have encouraged or been actively ‘involved’ in services to those companies which are caught by the MSC rules.

FCSA says the case highlights the very real danger of ignoring compliance in this area. “Since its creation, FCSA has advised of the need to take this issue seriously and ensure appropriate due diligence is in place to manage this risk.

“In simple terms, there are two different ways of doing this correctly. One is to leave contractors and freelancers alone to gather their own information on the different ways of working available to them and allow them to choose an appropriate service provider without help. 

“The other is for recruitment agencies to add value for their contractors by providing a preferred supplier list (PSL) of organisations which are providing their services in a fully compliant way.

“There are benefits and disadvantages to both approaches but either approach, if implemented thoroughly, can minimize risk.”

Stuart Davis, chair of FCSA, adds: “This need for appropriate due diligence is the basis of the FCSA Code of Conduct. We would advise all recruitment agencies to apply this Code or simply use FCSA member businesses if it wants to put a PSL in place.

“The Code demonstrates that FCSA member businesses are operating compliantly with all relevant legislation, including MSC legislation, and therefore deals with the Transfer of Debt risk directly. Such an approach enables recruitment agencies to establish robust PSLs, which deliver benefits both to their contractors and their own businesses, without exposing themselves to the significant risks in this area.”