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Rob hyrons - Fotolia
Rob hyrons - Fotolia
IR35 REFORMS: IT CONTRACTORS WARNED OFF JOINING NON-COMPLIANT UMBRELLAS TO AVOID
LOAN CHARGE RISK
*
*
CONTRACTING STAKEHOLDERS ARE CALLING ON THE GOVERNMENT TO DO MORE TO REGULATE
UMBRELLA COMPANIES AHEAD OF THE IR35 PRIVATE SECTOR REFORMS COMING INTO PLAY, TO
PREVENT MORE CONTRACTORS FALLING INTO THE SCOPE OF THE LOAN CHARGE
Share this item with your network:
*
*
*
By
* Caroline Donnelly, Senior Editor, UK
Published: 27 Feb 2020 11:45
IT contractors could end up saddled with huge, life-changing tax bills by
joining legitimate-looking umbrella companies for IR35 compliance reasons that
are not all they seem, experts warn.
Download this free guide
HOW THE UK GOVERNMENT IS COMMITTED TO TECH
As we slowly crawl closer to the mysterious future of post-Brexit Britain, the
UK government is committed to nurturing the booming technology industry. In this
e-guide we discover what strategies and plans are in place to keep the UK tech
industry relevant and ahead of the curve.
Start Download
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The claim comes in the wake of a letter-writing campaign by HM Revenue & Customs
(HMRC), directed at public sector contractors, that suggests recipients have
sought to avoid paying tax by being paid for work they have done previously in
the form of a non-taxable loan.
The letters, seen by Computer Weekly, claim recipients are yet to reach a
settlement with HMRC to cover the amount of tax they owe as a result of opting
to be remunerated in loans, rather than a conventional salary.
Computer Weekly understands that a sizeable proportion of recipients claim they
have never knowingly opted to be paid in this way and were unaware – until
receiving one of these letters – that they had been dabbling in what HMRC terms
"disguised remuneration".
And while it would be easy to write-off their protestations as something anyone
would say who had been caught doing something they should not be, MPs, tax
advisors and other assorted contracting stakeholders all share the view these
complaints have merit.
Recipients of these letters are known to include public sector IT contractors,
as well as teachers, NHS workers, and social care providers too, and HMRC
confirmed in a statement to Computer Weekly that all of them will be registered
on its systems as users of “disguised remuneration schemes”.
Some of the recipients on HMRC’s mailing list may have knowingly joined these
schemes, but it’s claimed there are many others who will have done so without
realising, by joining umbrella companies that did not openly disclose that
participants would be paid in loans.
READ MORE ABOUT IR35 AND LOAN CHARGE
* The UK government stands accused of overlooking the toll its latest disguised
employment clampdown is taking on the livelihoods of private sector IT
contractors, as doubts are cast about whether the initiative will raise the
£3bn tax revenue HM Revenue & Customs (HMRC) claims it will.
* New chancellor Rishi Sunak has sought to assure business leaders that the
IR35 tax avoidance reforms will not be enforced in a “heavy-handed” manner in
the private sector for the first 12 months.
* The IT contractor community shares its verdict on the UK government's plans
to revamp its controversial loan charge policy, which has left thousands of
people facing life-changing tax bills and financial ruin.
Computer Weekly understands that many of the letter recipients were moved to
join umbrella companies in the spring of 2017, as HMRC geared up to extend the
IR35 tax avoidance reforms to the public sector.
The reforms saw public sector contractors relinquish responsibility in April
2017, for determining how they should be taxed to the government agencies, NHS
trusts or local authorities, for example, who hired them.
As such, it became the responsibility of public sector bodies to decide if the
contractors they engaged should be taxed in the same way as permanent employees
(inside IR35) or as off-payroll (outside IR35) workers, based on the work they
do and how it is performed.
BLANKET DETERMINATIONS
To ensure compliance with the reforms, some public sector bodies are known to
have made blanket determinations that resulted in large numbers of contractors
being declared inside IR35.
In that scenario, contractors are often advised to cease providing services to
end clients via their own limited companies and join an umbrella company. This
is because they will have to pay a similar rate of employment tax and National
Insurance as a permanent employee would anyway.
The contractor pays the umbrella company a fee to take care of all the admin and
accounts work they would have previously done themselves while operating as a
limited company. To that end, the umbrella operator will also assume
responsibility for invoicing the client on the contractor’s behalf and ensuring
the correct employment tax deductions are taken from their salary.
In instances where umbrella companies pay participants in the form of a tax-free
loan, the contractor will still be relieved of all the above administrative
burdens in exchange for a percentage of their salary.
Now, if that sum is similar in size to the amount of money a contractor expects
to have deducted in tax and company fees from their salary by the umbrella,
there is a chance they may not notice they have joined a loan scheme as their
take home pay remains the same.
“Schemes popped up all over the place in the wake of the IR35 reforms, and
contractors without a firm grip of tax law were unwittingly being misled into
using them,” Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, told
Computer Weekly. “There is simply no way a compliant payroll firm can offer a
tax saving [to employees] because the contract rate must be treated as
employment income – and every payroll firm has to follow the same tax laws.”
According to data from the Association of Professional Staffing Companies
(APSCo), the 2017 reforms coincided with a drop in the number of contractors who
provided services to public sector organisations through limited companies, as
many opted to work through umbrella setups instead.
THE DIFFERENCE BETWEEN GOOD AND BAD UMBRELLA COMPANIES
And while there are a great number of reputable umbrella companies out there,
there are plenty of others that are acting as a front for loan-based
remuneration schemes, without necessarily disclosing to participants that they
are being paid in loans, it is claimed.
“Many people are only just finding out now they were put into loan schemes,” Sir
Ed Davey, MP and co-chair of the Loan Charge All Party Parliamentary Group
(APPG), told Computer Weekly. “It is deeply concerning that many public sector
workers are now receiving letters from HMRC, which is causing huge anxiety for
many nurses, doctors, social workers, teachers and other key workers.”
And with the government gearing up to extend the IR35 reforms to the private
sector in April 2020, there is real risk that another tranche of contractors
will fall into a similar trap this time around too, warned Dr. Iain Campbell,
secretary general of the Independent Health Professionals Association (IHPA),
whose members include locum doctors and NHS workers.
“Our organisation has been contacted by a flurry of panicked members who have
received letters from HMRC after they were mis-sold umbrella loan arrangements
as a consequence of the public sector off-payroll [IR35] reforms,” he told
Computer Weekly.
“We have been warning of this link for some time and are worried that [the]
private sector roll-out of these reforms is likely to cause yet more workers to
be mis-sold such arrangements.”
BLANKET BANS
As was the case in the public sector, the lead up to the private sector reforms
coming into play has seen many firms issue blanket bans on the use of limited
company contractors or declare that all their off-payroll workers are inside
IR35.
For this reason, it is likely there will be a similar surge in the number of
contractors joining umbrella companies in the coming months too, said Andy
Chamberlain, deputy director of policy at the Association of Independent
Professionals and the Self-Employed (IPSE).
“Lots of people are going to be pushed into working through umbrella companies
whether they like it or not. And while many umbrella companies are perfectly
complaint organisations, there are others that are not and some of them have
promoted some of these disguised remuneration schemes,” he said.
“There is a real risk that people are going to be pushed into these
[non-compliant] umbrella companies because of the IR35 private sector rollout
and get themselves somewhat unwittingly involved in a disguised remuneration
schemes that the government many come along at a later date and say they don’t
like.”
To avoid such a fate, it is important that IT contractors do their research into
any umbrella company they are thinking about signing up with, said
ContractorCalculator’s Chaplin.
QUALITY CONTROL
There are several trade associations – including the Freelancer and Contractors
Services Association (FCSA) – that carry out “in-depth quality control processes
and audits” on umbrella companies, he said, so it is worth checking first if a
prospective umbrella company has been vetted by one of them.
There is no requirement for umbrella companies to submit themselves for auditing
by trade associations, and there are other background checks that IT contractors
should also do to ensure the umbrella they are evaluating is compliant with UK
tax laws, he added.
“Contractors who wish to ascertain whether any payroll scheme is [tax] compliant
or not can simply go into Google and type ‘salary calculator’ to understand [how
much tax] they should be [paying]. Under the new [IR35] rules, the rate paid to
the contractor must be treated as employment income – which means just the same
as a permanent salary,” he said.
“Secondly, they can ask [the provider] for a Key Information Document and a
detailed tax illustration, and check that against the standard salary
calculation.”
It is also important that IT contractors receive a full and transparent
breakdown of all the deductions the umbrella company will be taking from their
salary to ensure their money is going to the taxman as assumed, Chaplin added.
“They need to be careful not to assume take home pay being what they would
expect under a salary to indicate the correct tax has been paid,” he cautioned.
CLAMPING DOWN TO PROTECT CONTRACTORS
According to HMRC’s own figures, there were more than 6,000 first-time loan
scheme users recorded in the wake of the public sector IR35 reforms during the
2017-18 tax year, which is the highest rate of enrolment since records began.
And a further 3,000 individuals signed up during the first half of the 2019-2020
tax year too.
As a result, these individuals have now found themselves pulled into the scope
of HMRC’s controversial loan charge policy, which has left thousands of IT
contractors saddled with life-changing tax bills relating back to work they did
between 9 December 2010 and 6 April 2019.
The HMRC letters to public sector contractors are designed to make them aware of
this, while also notifying them of a series of changes that have recently been
made to the policy, in the wake of a recent independent review into it by
ex-National Audit Office comptroller Sir Amyas Morse.
The review itself confirms the market conditions that enabled loan schemes to
thrive still exist, and the government said in its response to its findings that
more will be done in due course to clampdown on companies and individuals who
promote loan-based remuneration schemes.
So while there are steps that IT contractors can take to protect themselves from
inadvertently falling into tax avoidance schemes, the onus should be on HMRC and
the government to ensure they are doing all they can to stamp out these bad
actors, said Steve Packham, a spokesperson for the Loan Charge Action Group
(LCAG).
His organisation is actively campaigning for all retrospective elements of the
loan charge to be scrapped, meaning the policy would only affect individuals who
entered schemes after the policy came into effect in April 2019.
LOAN CHARGE SCANDAL
The letters being sent out to public sector workers constitute another phase of
the “loan charge scandal” and highlight just how the policy’s impacts are
continuing to be keenly felt across the self-employed sector, he added.
“[This] shows the issue is far from being resolved and at the same time we know
that schemes are still being promoted and the government and HMRC are doing
nothing to prevent this,” said Packham.
A relatively easy win on this front would be for the government to act on the
discussions it has had in the past about the importance of ensuring umbrella
companies are properly regulated, said IPSE’s Chamberlain.
“They [the government] said they thought this is a good idea, and that they were
going to work towards doing it, but they've basically done nothing about it,”
said Chamberlain.
For instance, there was recommendation made to regulate umbrella companies in
the government-commissioned 2017 “gig economy” review by former Tony Blair
advisor Matthew Taylor. It made the case for umbrella companies to be covered by
the Employment Agency Standards legislation, which exists to protect the rights
of agency workers.
UMBRELLA AND LOAN SCHEME LINK
The Morse review also highlights the link between umbrellas and loan schemes,
while rightly stating that it was “always possible” for individuals to work via
an umbrella without joining a loan scheme.
Even so it also claims that, during the compiling of the review, Morse “saw
evidence of loan schemes being sold as part of a package alongside employment
through umbrella companies, merging two distinct concepts”.
Given the number of public sector contractors who have found themselves
registered on HMRC’s systems as participants in disguised remuneration in the
wake of the public sector IR35 rollout, this is another reason why the
government should hold off on repeating this process in the private sector, said
Chamberlain. At least until umbrella companies are subject to regulation.
“It would be a sensible move [on the government’s part] to regulate umbrella
companies to try and stamp out this poor practice because we know for a fact
that more people are going to be pushed into these structures as a result of the
private sector IR35 reforms. And that will almost certainly lead to tax
avoidance, and even tax evasion,” he said.
“It would be much better if the government hit pause on IR35, got the umbrella
companies sorted, and maybe looked at an alternative model to IR35. And if they
can’t find [an alternative], at least they have regulation in place before it
goes ahead.”
READ MORE ON IT FOR GOVERNMENT AND PUBLIC SECTOR
* IR35 TRIBUNAL SEES NATIONWIDE PROJECT MANAGER LOSE £70,000 TAX BILL APPEAL TO
HMRC
By: Caroline Donnelly
* IR35 PRIVATE SECTOR REFORMS: TREASURY REVIEW CONCLUDES NO DELAY NEEDED TO
APRIL 2020 START DATE
By: Caroline Donnelly
* IR35 PRIVATE SECTOR REFORMS: NATIONAL GRID CONTRACTORS UP IN ARMS OVER TAX
STATUS ASSESSMENTS
By: Caroline Donnelly
* IR35 PRIVATE SECTOR REFORMS: IT CONTRACTORS WEIGH UP THEIR POST-APRIL 2020
WORK OPTIONS
By: Caroline Donnelly
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* How to build the perfect tech team despite talent shortages
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Latest Blog Posts
* Elementor opens free ‘experts’ network for pro web creators during COVID-19 –
Open Source Insider
* What is InnerSource anyway? – Open Source Insider
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* IR35 reforms put IT contractors at risk of 'second ... – ComputerWeekly.com
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