Over the years, MAYACHI has frequently been asked by recruitment agency directors whether they can engage internal recruitment consultants through their own limited companies instead of paying them through the company PAYE scheme.
While this arrangement can sometimes appear attractive as a way to reduce payroll costs and increase flexibility, it can also create significant legal, tax, and commercial risks for the recruitment agency.
Below are some of the key risks agencies should consider before paying recruitment consultants through limited companies.
IR35 and Off-Payroll Working Risks
Just as contract workers supplied through recruitment agencies must be assessed under IR35 legislation, the same considerations apply when engaging an internal recruitment consultant through a limited company.
The key issue is whether the consultant is genuinely operating as an independent business or is, in fact, functioning as an employee.
HMRC may examine factors such as:
- Whether the consultant works exclusively for the agency
- The level of control the agency has over working hours, duties, and location
- Whether the consultant has the right to provide a substitute
- Whether the consultant is integrated into the business in the same way as permanent staff
If HMRC considers the arrangement to be “disguised employment”, the agency could become liable for unpaid Income Tax, National Insurance contributions, interest, and penalties.
Employment Rights Claims
Even if a recruitment consultant invoices through a limited company, an employment tribunal may still determine that they qualify as an employee or “worker” based on the reality of the working relationship.
This could expose the agency to claims relating to:
- Holiday pay
- Pension auto-enrolment
- Sick pay
- Unfair dismissal
- Discrimination
- National Minimum Wage breaches
This risk can become particularly significant where consultants are engaged on a commission-only basis.
Employment tribunals will usually focus on the practical working relationship rather than relying solely on contractual wording.
Agency Workers Regulations (AWR) Risks
Recruitment agencies also face additional regulatory exposure under the Agency Workers Regulations 2010 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003.
These regulations govern how workers are supplied and managed and can create disputes around:
- Worker classification
- Equal treatment rights
- Pay parity
- Holiday entitlement
Failure to assess these risks properly can lead to compliance issues and potential financial liabilities.
HMRC “Managed Service Company” Concerns
There can be serious risks for agencies that are seen to facilitate or encourage these types of arrangements, particularly if they:
- Assist the consultant in setting up the limited company
- Direct how payments are structured
- Exercise financial control over the company
In these circumstances, HMRC may view the arrangement as falling within Managed Service Company (MSC) anti-avoidance legislation.
This can result in significant tax liabilities, investigations, and reputational damage for the agency.
Restrictive Covenants and Intellectual Property Issues
One of the most overlooked risks of engaging consultants through limited companies is that contractor relationships are often more difficult to control and enforce compared to traditional employment relationships.
This can create issues around:
- Ownership of client and candidate relationships
- Database and intellectual property rights
- Confidentiality obligations
- Post-termination restrictions
Courts may also scrutinise restrictive covenants more closely where there is no formal employment relationship in place, potentially weakening the agency’s legal protections.
A Risk That Requires Careful Consideration
MAYACHI’s position on paying recruitment consultants through limited companies has consistently been that the risks generally outweigh the benefits. While the practice still exists within the recruitment industry, agencies should approach these arrangements with extreme caution.
If an agency is currently engaging internal workers through limited companies, it is strongly recommended that they review the tax compliance, legal structure, and enforceability of those arrangements before continuing.
Seeking specialist legal and tax advice at an early stage can help agencies avoid significant future liabilities and protect the long-term stability of the business.
