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Agencies and the myths of debt transfer

by Crawford Temple at 09:53 27/08/07 (News)
In December 2006 the Government announced its intention to tackle, what they believed was, non compliance in the contracting sector. As a result they introduced a new piece of legislation in The Finance Bill 2007, the Managed Service Company Legislation.
Whilst this legislation predominately focuses on the contractor and how they structure their affairs there is a further dimension, Debt Transfer Rules, which has caused great concern to many providers of services to contractors.

In the period from December 2006 to date there have been a wide and varied range of articles and seminars to 'enlighten' key players on what this legislation actually means.

Unfortunately most of these seem to have been built around an agenda of new business generation rather than accurately reporting the facts.

Over and above this, the articles in the specialist press have bordered on scare tactics, and once again failed to take in all the relevant facts.

With the legislation now law, and guidance now published, I will attempt to make a balanced assessment, from an agencies perspective, on one of the key decisions all agencies are facing today - What to do about a PSL, should an agency have one, should it be umbrella only, and what risks are associated with having it? -

Reasons
There are clear, and valid, commercial reasons why an agency should operate a PSL:

  • Assist the contractors select 'reputable' providers of services.

  • Protect the agency, contractors and end clients from any potential future, and unforeseen, liabilities.

  • End clients insist on a level of care as they are cautious on structures due to issues such as money laundering, colluding in tax avoidance and employment issues.

  • Potential reduced administration burden as a result of only dealing with a limited number of organisations.

All the reasons why an agency had a PSL previously are as valid today as they were previously. Nothing has changed in that respect, in fact it could be argued that with the implementation of this new legislation there is now an even greater need to run a PSL.

HMRC are also keen for agencies to continue with a policy of PSLs for two main reasons: -

  • 1. They do not believe that agencies have the requisite knowledge to make any recommendations as to the best operating structure for their contractors. This point also demonstrates the need for a PSL to go beyond umbrella providers.

  • 2. With the new MSC Legislation agencies will now have to carry out reasonable due diligence on any provider they select for a PSL. HMRC see this as a simple way to marginalise the non compliant providers in the marketplace. (One of the driving factors in this legislation was to address non compliance.)

Should the PSL be limited to umbrella providers?
There is a consensus of opinion, currently doing the rounds that by only having umbrella providers on a PSL is a 'safe' option. This seems to stem from the fact that umbrella providers are outside the scope of the MSC legislation and are therefore 'safe'.

Let us just examine more closely this modern day myth - it suggests there are no risks associated in dealing with umbrella providers and new unacceptable risks, as a result of the new legislation, associated with limited company providers.

In my view there is a risk in dealing with any provider of any service - especially if you have not taken reasonable steps to ascertain the validity of the offering and safety of the company.

Let us look specifically at the 'safe' umbrella example. Typically an umbrella provider would operate with an expense dispensation from HMRC; this would include an allowance for travel and subsistence.

Travel and subsistence expenses are allowed as the contract of employment that the contractor works under, is classed as an overarched employment contract. If at some point HMRC felt the contract was not overarched then these expenses could be disallowed and your contractors face additional tax liabilities.

If you, the agency, had recommended that provider I would suggest that you may have a number of contractors making representations to you.

The key issue I am attempting to illustrate is that there are always risks in dealing with third party providers. The essential point is to understand the risks and take the appropriate steps to minimise them.

Clearly every agency that operates a PSL takes detailed steps to ensure any provider on the PSL is appropriate, as best as they can judge. They have to satisfy themselves that a Providers offering is legitimate, robust, compliant and secure.

They also, and probably more to the point, want to ensure that no third party provider could damage their own 'brand'.

This is the point where the modern day myth of huge debts being passed to an agency becomes 'busted'.

If an agency applies the same care, reasonable steps and due diligence processes, whether the provider is offering umbrella or limited company solutions, there is no risk to the agency as a result of the new legislation.

An agency should, whether it is umbrella or limited company provider, as a matter of good business practice, always keep accurate records of their due diligence. These records, showing you have taken reasonable steps, remove the agency from the debt transfer rules.

Having a PSL can, if implemented correctly, be a real benefit to the business. Any risks, which are minimal, regardless of whether it is an umbrella or limited company provider, are more than outweighed by the benefits where a robust due diligence process is in place.

In conclusion I would suggest that if you felt you had the business reasons previously to justify having a PSL then nothing has changed, and as I mentioned, the reasons are probably even more compelling now. That PSL can include both umbrella and limited company providers as there is no additional risk, in either case - as long as your processes for selection are robust and demonstrable.

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Crawford Temple

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