Whenever you have a recruiter working within your recruitment company, it is vital to pay them as an employee of your business via PAYE payroll, so that all of the salary and commission payments they receive comply with the prevailing rules for national insurance and tax.
In any case, such work that a recruiter undertakes under a recruitment agency director’s supervision, direction and control is deemed by HMRC to be equivalent to an employee’s.
What’s more, paying a recruiter through PAYE gives your agency greater protection under employment law and enables you to impose restrictive covenants – in relation to such matters as establishing a competing business or the use of agency data – in the event of that staffer leaving.
However, we have also been asked various times in recent years whether it is possible to pay a recruitment consultant via their own limited company or sole trader entity, rather than the PAYE payroll. There are various reasons why this may be considered – for example, the person being on a short-term contract or paid on a commission-only basis, with no basic salary.
In short, we would urge you to avoid paying your recruiters via this method, for the following reasons.
You could attract unwanted scrutiny from HMRC
HMRC may decide to launch an investigation into your agency’s conduct if it suspects that you are paying a staff member via a sole trader entity or limited company, when they should instead be paid under PAYE. If HMRC concludes that you should have used PAYE to pay such a recruiter, you may be forced to pay penalties, fines and back tax.
It makes restrictive covenants harder to enforce
If you do pay a recruitment consultant through a limited company or sole trader entity and they then leave your agency in favour of working for another agency or setting up their own business, you will be powerless to prevent them from using the client and candidate data that they accumulated during their work for you.
You could be paying them less than minimum wage
Your agency may have agreed with the recruiter to pay them for the commission-only element, so that it isn’t as obvious that they are an actual employee of yours. But what happens if the recruiter then works the hours for you, but makes so little commission each month that they are effectively being paid less than the national minimum wage? Well, they may opt to turn this against you.
It only gives the recruiter any tax benefits if they are evading tax
A recruitment consultant using a limited company or sole trader entity is required to comply with the same rules and regulations as a temp/contractor in accordance with IR35. Under IR35, they would be classed as an employee. This means the limited company or sole trader entity would have to pay them under PAYE with no allowable expenses, so that they don’t benefit from a tax perspective. If, though, the recruiter instead declared themselves to be a self-employed worker and used this benefit to give themselves a small salary, expenses and dividends, HMRC may deem this to be tax evasion, which would be another situation in which the agency could be vulnerable.
When you want to avoid the repercussions for your agency of paying staff outside the PAYE payroll, there are few better options than seeking out the expertise of TBOS. We provide the recruitment payroll outsourcing services that will enable your firm to rest easy while remaining competitive and profitable compared to its agency rivals.
Get in touch with our office now to discuss your recruitment company’s accounting and back office needs with us.