Julia Kermode, chief executive, Freelancer and Contractor Services Association, discusses the latest developments
We welcome the news that off-payroll reforms have been delayed for 12 months, until April 2021. This is the right decision to help support businesses in these extremely difficult and unprecedented times. It is right to enable businesses to focus on the immediate complexities of responding to the coronavirus pandemic which must be the absolute priority for everyone in the UK right now. However, we must reiterate that this announcement only applies to the reforms that were due to impact on the private sector from April 2020. The changes that were introduced to the public sector in 2017 are still very much applicable and will need to be adhered to. Furthermore, we are aware through our evidence submitted to various government bodies, including the House of Lords, that some businesses have spent in excess of £700K in preparing for the private sector reforms which illustrates only the tip of the iceberg of the cost to businesses and the economy. I very much hope that some detailed analysis of the wider implications of this reform can be undertaken in the coming months in order to establish whether or not it should be scrapped entirely, rather than simply ploughing on in 12 months’ time.
Tax avoidance schemes are once again rife as they aggressively seek to profit from the planned off-payroll changes; luring unsuspecting contractors into not paying tax and NICs. The individual that signs up to the scheme is personally liable for the debt of unpaid tax and NICs and will ultimately receive a large tax bill. We saw an exponential increase in such schemes as a result of the 2017 public sector changes and we have always lobbied for a delay to private sector roll-out until HMRC has adequately stamped out such dodgy practices. I had hoped that lessons would have been learned from the loan charge fiasco but unfortunately, our pleas have not been heeded and the reforms are coming anyway. Whilst HMRC is well aware of such schemes and has confirmed that they are taking firm action to shut them down, I haven’t seen much evidence of action being taken against scheme providers. There is certainly much more that needs to be done. In the meantime, my advice is to ensure that 100 per cent of your candidates’ inside IR35 income is paid via payroll. I know many recruitment businesses will be engaging umbrella employers as a result of the planned off-payroll legislation. From a recruiter’s perspective, the primary gain is that the umbrella will process the payroll, therefore alleviating the recruitment business of their fee-payer responsibilities, although umbrella is much more than just payroll. Compliant umbrellas employ contractors and by virtue of that employment the contractor’s IR35 status becomes irrelevant. In other words, by employing the worker, they are outside of IR35, because, by definition, the worker is an employee. A word of caution, however; you must ensure that the umbrella is genuinely employing the worker otherwise there could still be an IR35 risk. There are lots of firms that appear to be umbrella but don’t employ the worker, and in that scenario, IR35 could still be an issue. A key point to bear in mind when working with umbrellas is being clear about the pay rate your candidate will receive. It is important to realise that the amount of money paid to the umbrella is not the worker’s gross pay, it’s their gross pay plus overheads – often referred to as the assignment rate. It’s the same principle as a lawyer, accountant and other professional firm charging a day rate for work undertaken by one of their employees. The amount charged is never solely that employee’s pay but usually an inflated rate to cover the firm’s costs. With an umbrella, they retain a margin from the assignment rate paid to them and they also deduct overhead costs that cover the cost of employment – such as employers NICs, apprenticeship levy, pension, etc. There is no other money paid to the umbrella, i.e. they do not receive a fee in addition to the assignment rate, so these overheads must come from the assignment amount paid to the umbrella. Once the margin has been retained and the overhead costs deducted from the assignment rate, the amount left is the worker’s gross pay. The gross amount is then processed through payroll and at this point, deductions are made from the worker’s income.
Room to confuse
It can be very confusing for workers in instances where they have been misled into believing that the assignment rate is their gross pay. This is a very significant issue right now in the context of off-payroll changes. Your candidates will have been used to receiving a certain amount of money from your client, and if the sum of money that your client spends is not changing then, understandably, your candidates are going to perceive that they are paying for the overheads However, this will not be the case with a compliant umbrella, plus it is illegal to deduct employers NICs from a worker’s pay. I know that some contractors believe that by insisting on agency-PAYE for inside IR35 roles they will be better off, however, that is short-sighted because there will still be the same overhead costs incurred by the agency. If the client can’t increase the amount paid to the agency to cover these costs the same situation will occur – unless the agency isn’t savvy enough to factor in the on-costs. All of this shows why so much care has to be taken in renegotiating contracts and pay rates before any inside IR35 assignments starting. It is essential that your candidates know how much they will be paid and whether the rate being quoted is inside IR35, and in turn whether that rate includes all of the overhead costs.
These misunderstandings are set to become a thing of the past with the forthcoming key information documents (KIDs) that all agency workers will be required to be given from April 2020. The purpose of the KID is to give workers clarity regarding how much they can expect to be paid, by whom, when, any deductions, the list goes on. KIDs must be written in plain-English, be no more than two sides of A4, and be given to all agency workers before agreeing on contractual terms. Agencies are legally responsible for giving their workers KIDs from 6 April 2020 and it is expected that the umbrella (if you are working with one) will supply the agency with relevant information to pass on to the worker as appropriate. Just one more point to mention which is perhaps the most important one for your clients. I am pleased to see that HMRC is finally using their Corporate Criminal Offence (CCO) powers that were originally conferred within the Criminal Finances Act which became law in 2017. Nine businesses are currently under investigation for failing to prevent tax evasion, with a further 21 investigations in the pipeline. The sectors currently being looked into include financial services, oil, construction, software development and labour provision. The CCO has potentially unlimited fines for organisations found guilty of the offences and can be found guilty even if directors were unaware. Importantly, the offence covers any transactions associated with a business, i.e. the tax evasion does not have to happen within the business itself, but anything associated with it, meaning that supply chains are particularly at risk. In essence, this means that you or your clients could be found guilty of a criminal offence and face an unlimited fine if there is a tax avoidance scheme within the supply chain, whether by design or a complete accident. You must, therefore, do your due diligence on any intermediaries involved in your supply chain and take steps to ensure that no tax avoidance schemes are lurking in the chain pretending to be a compliant business. Be very sceptical of “umbrella” businesses offering unrealistic incentives for referrals. Whilst it is tempting for you and your staff to accept these you should remember that a compliant umbrella employer simply does not have vast amounts of spare cash to throw at generating business. So you should question whether you are willing to accept such incentives along with the very real and significant risk of a criminal offence and unlimited fine – we know that HMRC is active in this space and it is not a risk I would take.