This explains the implications for your agency and company if your contractors in Canada are using their personal Ltd Company. It assumes that you’re dealing with a UK Contractor who has a personal UK Ltd Company which they want to use. Many of the issues are the same for personal service companies registered in other countries (except Canada).
- What are the agencies' responsibilities?
- How do you alleviate the risk?
- What can go wrong?
- What are the potential risks to your agency?
- What is the risk to the client?
- What is the risk to the contractor?
- What else can you do?
- Talk to us for more advice
Your contract with your client will probably mean your agency bears responsibility to ensure that the contractor is legally working in Canada (i.e. that they are compliant with all relevant local employment, taxation and immigration requirements). The client will hold your agency accountable if this isn’t the case. This could mean you just lose their business or (in the worst case) they may commence action to recover fines or penalties which they incur if the contractor isn’t compliant.
If you are a UK recruitment agency, you will already be familiar with the basic steps you take when placing a new contractor. You need to get copies of their company incorporation certificate and VAT registration certificate. You should also get proof of individual’s identity (such as scanned passport or driver’s license) and potentially their National Insurance number. This ensures you have verified their identity and company registration. Not only is this common sense, it’s also one of the requirements of money laundering legislation.
For foreign assignments, it’s recommended to take a couple of further steps by checking that the Ltd company has been registered for tax and VAT / sales tax in Canada and also that the contractor has registered with the local taxation system for tax and social security. In some circumstances, the contractor may be able to continue paying social contributions in the UK by supplying a form to the tax authorities in Canada.
Obviously it may take time for the contractor to complete these registrations but, if you pay their UK Ltd company without confirming they are registered for Canada tax, it exposes your agency and client.
It’s unlikely that the tax or employment authorities in Canada will investigate your agency directly, but your client is open to inspection by their internal compliance officers, external audits which they may undertake, as well as those direct with the local authorities. Unfortunately, UK Ltd companies get a bit of extra scrutiny at home (and with many foreign jurisdictions) because of some well-publicised cases of abuse. Don’t forget your contractor will be subject to immigration scrutiny each time they cross the border.
Lastly, the UK HMRC may rule the contractor is still liable to UK tax and national insurance. This raises the possibility of IR35 and its counterpart in Canada.
The most common danger is damaging the relationship with your client and contractor, although the risk to your agency’s reputation shouldn’t be understated. If the client is investigated or fined because the contractor was on site illegally or wasn’t tax registered, then there may also be significant financial penalties for the client which are passed onto the agency through the indemnity clauses in your contract. You should pass these same indemnity clauses on to your contractor’s limited company – but their personal liability is somewhat shielded by the limited company setup.
The client has to ensure that any workers on its premises have the legal right to work in Canada and that any employees or contractors that it uses comply with local tax regulations. If your contractor is found to be liable for local tax but hasn’t registered or paid it, then the authorities may seek to recover funds through the client.
In the worst case scenario, the authorities may rule that your contractor was effectively an employee of the client and the client will be liable for income tax deductions and employers’ social contributions. If the contractor is stopped at the border and doesn’t have the right work permission, they will be deported or refused entry. This poses an immediate problem to the client if their work contribution cannot be easily replaced.
However, if they’re caught on site without a work permit, the employer can be hit with a range of penalties including substantial fines. It may also limit their ability to employ foreign nationals in the future.
If your contractor doesn’t have the right immigration permission, they may be refused entry or deported. If they aren’t paying tax or contributing to national insurance or social security in Canada, there is potential for fines and worse if the avoidance is ruled deliberate. VAT or sales tax is another liability which they may neglect. If they are collecting tax but not paying it to the authorities the penalties are very serious indeed.
If the contractor can show full compliance with their UK Ltd company (i.e. they are registered with all the relevant authorities in Canada before the contract is signed), then you may feel comfortable enough to proceed. If you want to be fully assured that everything is above board, then utilise a specialist contractor management company who run a local payroll in Canada. This doesn’t stop your contractor from maximising their net income, but it does ensure that they are registered for (and paying) all local taxes and social contributions. The best umbrella companies can also arrange sponsorship for contractors, if necessary, so they are legally entitled to work in Canada.
If you would like more advice on placing your contractor into Canada, please talk to us. We can get you the information you need and help you find the most appropriate solution. We’re partners with a multitude of Canada contractor management companies, and we’ll check with them to ensure you receive accurate information. We also have a detailed knowledge of their offerings, and we can find you a company which will payroll your contractor legally. They will also supply the supporting documentation to reassure your client that the contractor is properly registered and compliant. Our advice is completely free, and there is no obligation.
Get in touch with us today and see what we can do for you!