As a recruitment business engaging both self-employed and employed workers, it’s crucial that you’re aware of SDC legislation and understand how to demonstrate full compliance.
We’ve supported 300+ recruitment businesses with agency compliance.
What is the Agency Legislation?
The agency legislation is a UK law introduced to prevent recruitment agencies from facilitating false self-employment to avoid employment taxes.
Following the consultation of the Onshore Intermediaries legislation, in April 2014, the agency legislation was amended to include new anti-avoidance provisions, a record-keeping and returns regime, and additional responsibilities for recruitment agencies. These agencies are now required to determine a worker's employment status using a Supervision, Direction, and Control (SDC) questionnaire, and are responsible for identifying who must deduct and remit income tax under PAYE (Pay As You Earn) and National Insurance contributions.
Supervision, Direction and Control questionnaire
An SDC questionnaire focuses on ‘how’ the work is carried out by a worker and governs whether a worker is subject to (or to a right of) SDC. If a worker is deemed to be subject to SDC, they must be placed on the payroll as an employee. Consequently, their earnings will be subject to PAYE and Class 1 National Insurance Contributions, both from the employer and the employee.
As a reminder, GOV.UK provides the following guidance on SDC:
Supervision refers to someone “overseeing another person who is carrying out the work to ensure that they are doing it and that the work is being done correctly”. For supervision to apply, a worker could be seeking advice or assistance from someone else to develop their skills and knowledge.
Similarly, direction refers to someone forcing “a worker to do their work in a certain way by providing them with instructions, guidance, or advice as to how the work must be done”.This could often involve someone co-ordinating how the work is done.
Finally, control is seen as someone “dictating the work that an individual carries out and how they go about completing it”. When an individual is self-employed, there should be an absence of control over how, what, when and where their work is performed (aside from site safety restrictions and project logistics).
It is important to note that a contractor doesn’t need to be subject to ALL three of the above to be considered ‘under SDC’. For example, a contractor may not be directed or controlled, but if they are supervised, or if there is the right of supervision, then supervision, direction and control applies (Contractor Calculator).
When does the agency legislation apply?
As stated on the GOV.UK website, for the agency legislation to apply, the following conditions must all be met:
- The worker must personally provide services, (which are not excluded services) to the client, and
- there must be a contract between the client (or a person connected with the client) and a person who is not the worker, the client, or a person connected with the client (that is, “the agency”) and under or in consequence of that contract: the worker’s services are provided, or the client or any person connected with the client pays, or otherwise provides consideration for the services, and
- the worker must be subject to (or to a right of) supervision, direction, or control (by any person) as to the manner in which they provide their services. This includes the client, the agency, independent project managers, consultants etc, and
- remuneration receivable by the worker in consequence of providing the services does not constitute employment income/employed earners earnings before the provisions of the agency legislation are applied.
For further information on when the agency legislation applies, visit the GOV.UK website.
IR35 Vs Agency Legislation
Scope:
- IR35: Primarily targets contractors working through Personal Service Companies (PSCs).
- Agency Legislation: Targets workers providing services through agencies or intermediaries.
Purpose:
- IR35: Ensures disguised employees pay correct tax and NICs.
- Agency Legislation: Ensures agency workers pay correct tax and NICs.
Criteria:
- IR35: Based on employment status tests like control, mutuality of obligation, and financial risk.
- Agency Legislation: Based on personal service provision and control by the end client.
Responsibility for Determination:
- IR35: Pre-April 2021 on PSCs, post-April 2021 on end clients (medium and large businesses).
- Agency Legislation: On the agency to deduct PAYE if applicable.
Tax Treatment:
- IR35: Treated as employment income if inside IR35.
- Agency Legislation: Treated as employment income if conditions are met.
Penalties for false self-employment
The correct determination of employment status under SDC legislation has significant implications for tax and National Insurance contributions. Should your business misclassify a worker or fail to demonstrate full SDC compliance, you could be liable to pay any unpaid tax and national insurance contributions, in addition to any further fines or penalties issued directly by HMRC. Not only this, but negligence could result in the debt being transferred to directors personally.
Agency legislation case law
In July 2022, the K5K tax case meant that Healthcare recruitment agency, K5K, were hit with a £260,000 tax bill, after they facilitated false self-employment amongst their workers.
We handle all aspects of your compliance
We’ve designed a simple and quick SDC questionnaire for your workers that allows us to select the suitable contract for their assignment and maintain the highest level of compliance.