Staffing companies that help PAYE temps and umbrella workers operate through personal service companies (PSCs) could seriously reduce the value of the company, according to a specialist recruitment sector lawyer.

Kevin Barrow, partner at Osborne Clarke, told Recruiter that many staffing companies are being tempted to “persuade” contractors to switch from working as PAYE temps or through umbrella companies and become PSC contractors instead.

He says a key reason is to avoid umbrella workers making equal pay claims under the Agency Workers Regulations (AWR), coming into force this October.

However, Barrow warns that a high proportion of those persuaded to switch to PSC contractor status may not actually fall outside its [AWR’s] scope. The Chancellor’s recent IR35 policy decision may now mean that, initially, they are not caught.

“This will lead to a lot of lost tax revenue, and HMRC may then decide it needs to carry out more inspections to review whether these new PSC contractors are genuinely outside IR35,” Barrow explains.

Contractors who fail to pass the ‘outside IR35’ tests may then decide they may as well claim the upside, ie claim AWR rights (including the same basic pay, disregarding expenses, as comparable perms), leaving staffing companies back at square one on AWR, argues Barrow.

According to Barrow, staffing companies could also fall foul of managed service company (MSC) tax legislation of 2007 that makes any hirer or staffing company, who facilitates or encourages contractors to work through PSCs, potentially liable for the tax that the PSC contractors would have paid if they were employees.

Osborne Clarke is currently advising on a £10m+ claim by HM Revenue & Customs under this legislation and it’s a very serious matter for the company concerned, says Barrow.

Barrow adds: “Even if HMRC do not get round to bringing a claim, this sort of contingent liability is likely to seriously reduce the value of the company in the eyes of any future merger partner or investor. The risk will be spotted by a buyer or investor’s advisers during the sale process.”