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Contractors warned not to be pressured by recruiters into incorporating to avoid AWR

Contractors have been warned not to be pressured by recruiters into incorporating to avoid the Agency Workers Regulations (AWR), as a wholesale move by umbrella company contractors into contractor limited companies could prompt HMRC to respond with increased IR35 investigations.

In an interview with the, Osborne Clarke partner Kevin Barrow said that “a high proportion of those persuaded to switch to PSC [personal service company] contractor status may not actually fall outside its [AWR’s] scope.”

As umbrella companies have been confirmed as falling within the scope of AWR, converting to a limited company may give former umbrella contractors a cost advantage over those remaining in umbrellas. And for some contractors, incorporating could be what keeps them in contract, even if the people involved might have preferred the equal pay and conditions granted by the AWR.

Barrow continues: “This will lead to a lot of lost tax revenue, and HMRC may then decide it needs to carry out more inspections to review whether these new PSC contractors are genuinely outside IR35.” And according to Barrow, contractors found inside IR35 may decide to go full circle and claim equal pay and conditions under the AWR.

The Managed Service Company (MSC) legislation presents a further threat to contractors, and potentially recruiters. MSC rules mean that, as with IR35, contractors falling foul of the rules and caught by HMRC must pay income tax and National Insurance Contributions (NICs) on their income as if they were employed.

Recruiters proven to have “facilitated or encouraged contractors to work through PSCs” may face transfer of debt obligations instigated by HMRC, thus becoming liable for income tax and NICs not paid by a contractor’s limited company, and this debt can be transferred to individual directors.

Despite the lack of high profile cases compared to IR35, the MSC threat is very real and, as reported by ContractorCalculator last month, Osborne Clarke is currently advising a staffing company and its director on a potential £10m transfer of debt claim by HMRC.

Contractors considering trading as a limited company should take advice from their recruiter with caution and vet contracting service providers carefully before taking any major decisions about their trading vehicles.

Published: 05 May 2011

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