With the tightening of tax, social security and employment issues across Europe, contract recruitment agencies are under increasing pressure to ensure that the contractors they supply are fully compliant with local regulations and as a consequence will not create liability for their clients or indeed for themselves.

The issue of compliance needs to be addressed from the perspective of both the end client and the agency. Let us first look at the effect of non-compliance on the end client. Clients across the E.U. have to face up to a tightening of existing regulations.

E.U. governments have recognised the enormous amount of potential income within the contracting sector that has in the past been overlooked.

Clients are being visited more frequently with a greater emphasis on compliance than previously was the case. During these visits, the authorities audit clients’ records to ensure that all wage tax and social security premiums have been correctly withheld and paid over to the authorities. These audits often encompass not only current but also past contractors, some going back as long as five years.

The results can raise several potential issues:
Who is employing the contractor? Are the contractors employed in a compliant way with regards to wage tax, social security etc.? Are they perceived to be in “deemed” employment? Is a work permit required? For example, all non-E.U. nationals require a work permit. (In addition, older EU member countries often still require work permits in regard to citizens of the newer EU member states). If the contractor is not paying the correct tax in the correct place at the correct time there will be a wage tax liability.

Where is the contractor paying social security contributions?
E.U. nationals are required to pay social security contributions in the country in which they are working unless they have a continuing liability to pay, and are paying, social security contributions in their home country. An E101 certificate confirms the continuing liability in the home country.

An individual will normally be tax resident in his own country unless he has applied to be taxed where he is working. Clients will require confirmation that the correct amount of tax is being deducted and paid over to the authorities and that the individual is correctly socially insured.

What could the consequences be for the end client should the tax and social security authorities investigate them and it is found that their contractors have not been employed in a compliant way?
Penalties vary from country to country but in general the contractor would be deemed to be an employee of the end client. All payments made to the agency for the services of the contractor would be considered as net payments. These payments would then be grossed up to calculate the amount of tax and social security that should have been paid