Kye Burchmore is director of Assured Tax Consulting which specialises in advice on employment status, IR35 and the agency legislation.
Assured Tax Consulting
I am biased but worth considering Assured Tax Consulting. Charge £149 + VAT and get a full report saying whether caught or not, highlighting the clauses that are helpful/problematic and ways in which the contract could be improved where appropriate.
Umbrella's can be costly
It is correct and unless the individual is incurring a reasonable amount of expenses, the umbrella route will not be a great solution because of the employer's national insurance being paid out of the money that would otherwise be the individuals gross. Certainly worth exploring the limited company route as it may be more beneficial if they earn a decent amount, the only risk being if they are caught by IR35 although the enquiries into IR35 are few and far between at the moment. One other option to throw into the mix is for the individual to work on a self-employed basis via a contracting company although I am a little bias towards this route :-)
That is correct
At the point your client paid another subcontractor was work within the construction industry he should have registered with HMRC as a 'contractor' under the CIS scheme (not just as a subcontractor) and verified each person he pays, make the necessary tax deduction and complete monthly CIS returns.
The only impact working on private houses would make is that your client would receive his money gross. This does not change anything in relation to your clients obligations under the CIS scheme.
It should apply to any and all sole-traders that use subcontractors (assuming they are in construction). Some people get confused by the fact they don't have CIS stopped from them if it is for private work and assume the same must apply down the chain but this is not the case.
Your client may find himself getting a few penalities pushed his way as well.
Shame their mood changes every 30 seconds.
I have had instances whereby I have been arguing cases with the same HMRC officer at the same time as each other with very similar facts but yet the officer reached different outcomes. I can't recall which tax offices but the HMRC officer coudln't care less that they were accepting one situation but not another with the same facts.
Once assessments raised and the case passed up the chain however it was quickly dropped.
Personally I would go down the 'independent' review route as well. I appreciate that it is carried out by someone within HMRC and therefore not truely independent but I have had a lot of cases dropped at that stage. When it goes for independent review you can set out you argument bearing in mind HMRC litigation and settlement strategy and of course throw in "Dave's position" into the mix and the fact that a similar case was accepted by HMRC.
I have found that generally the people higher up in HMRC (or the ones that would actually be the advocates at the tax tribunal) can better evaluate the case and its chances of success. The lower down bods often seem to get a bit stuck in their teeth and forget about the actual merits of the case.
Dig your heels in!
Umbrella and MSC
Sounds pretty normal for the agency to insist on you going through a different ltd company.
I agree that an umbrella operating PAYE correctly would not be caught by the MSC rules. There are however a number of umbrella companies that also offer a Personal Service Company Solution in addtional to the standard umbrella services.
The PSC model is certainly open to challenge under the MSC rules (and a number of companies are in fact currently being challenged by HMRC). Although each umbrella offering a PSC solution will give some vague reason why their set up is different and not caught, I am yet to be convinced and think those umbrella's are risky companies to contract with even if you only use their PAYE service rather than opting for the PSC model.
To answer the original question, the umbrella option would probably be the least hassle but it may not be the cheapest either (largely because of the employer's national insurance the umbrella has to account for).
Despicable but not surprising
I think HMRC are just tagetting companies in waves as and when they have the resources to take on more cases, I don't think it is to do with the amount of potential liabiltiies as I understand some of them are substantial.
There is the question of the Transfer of debt but given the fact that Costelloe and its directors are offshore and no longer trading HMRC will not get a penny from them and will look primarily at your client. You can try and push it onto the agency but I doubt it will take the focus and liability away from your client it will just be an extra avenue for HMRC to pursue as well as your client.
I think this definately has some way to run and will most liekly cause a great deal of prolonged stress for the client as well as taking up a considerable amount of time and energy for you both.
HMRC's approach to the enquiry is not surprising and whilst I believe they appreciate the clients didn't know what they were involved with, I understand that reducing client's to tears is a fairly common occurance for them with these cases.
Hope it all ends up working out for the clients and they don't jump from the chip pan into the fire by using some other dodgy PSC solution.
I would prepare your client for some very bad news and an extremely tough fight on her hands.
HMRC are currently arguing a significant number of cases like this and are not going to back down easily. IR35 is not the concern here at all, the MSC legislation is a completely different beast altogher and I would strongly recommend your client getting expert advice immediately.
HMRC have already built up an extensive knowledge about Costelloe Business Services and will essentially take the stance that your client will be caught by the MSC legislation unless she can prove othersie (which will not be easy given her likely circumstances).
It is worth bearing in mind that with the MSC legislation, HMRC can go after your clients personal assets and the liability will not simply disappear with the limited company.
I would get her to give Accountax Consulting a call as soon as possible as they know a lot about this area.
I know it might seem an obvious point and has been partly covered in the responses but along with verifying each of the other subbies and making the necessary CIS dedcutions. Gangleader 1 will need to register with HMRC as a "contractor", not just as a "subcontractor" and will have to complete monthly CIS returns - I believe the penalties for not registereing as a "contractor" have now been capped but it is something HMRC are quite hot on and used to levy extremely harsh penalties on.
The Gangleader also seems to have a bit of a rough deal as HMRC could argue that the subbies he pays are his employees and run an employment status argument on him instead of the client (regardless or whether he incorporates). Less likely but also possible is a challenge under s.44 ITEPA 2003 in which HMRC could argue that he is simply supplying people to the end client and therefore obliged to operate PAYE and NI. Most HMRC inspectors wouldn't go down this route but I have seen it done before.
A lot more to it...
Accountax Consulting used to advise people how to set up umbrella companies correctly, I assume they still offer this advice. It won't be cheap but there is a considerable amount for you to understand before going into this area to ensure you don't get saddled with a significant personal liability or inflict the same on other people/companies.
Personally, I think you are massively underestimating what is involved and the knowledge you will need to enter into this area.
If you are looking at working with limited company contractors, I wouldn't as this creates a significant MSC risk for everyone in the contractual chain (unless you providing accountancy services only - in which case your question should be how to set up an accountancy practice, not umbrella). If you are looking at a PAYE umbrella route you may want to start of reading:
The MSC legislation and understanding why umbrellla's may/may not be caught and the consequences of this legislation (if you are not operating perfectly).Employment legislation, rights, benefits, case law etc. The individuals will be employees of your company and you will have to have up to date and accurate knowledge.Expenses legislation and case law so that you have a detailed knowledge of what expenses could genuinely be claimed by an employee.Agency legislation, your business cannot fall within this legislation otherwise you will be hit with a unthinkable liability.I would read the Reed Employment v HMRC case that was publised this year as that may be an eye opener for you.You will also need to understand how the change in pensions will affect an umbrella and the way it calulates pay.The calculation of the individuals pay and their pay slip has be perfect to ensure you do not get claims for unlawful deductions. holiday pay or a NMW enquiry. You will have to have a crystal clear understanding of the Agency Workers Directive and how you will operate in light of this.Right to work in the UK and ID checks
These are just the most obvious things that spring to mind and you will need to have a solid grasp of these points before you realistically consider going into this business.
This is putting to one side many commercial points such as why would an agency contract with you when there are hundreds of umbrellas. Your new company will have no credit history, your knowledge in this area will be very limited compared to your competitors, some agencies want kickbacks which you cannot offer if you charge a discounted rate. Unfortunatly some umbrella's operate badly an cut a number of cornders meaning you will never be able to compete with them assuming you want to operate correctly. You will need insurance to cover the services provided which does not come cheap - the list goes on.
The only thing of substance you appear to be offering an accountant for a joint venture is sales - Instead of starting your own umbrella, I would consider simply going to an umbrella and offering your self-employed sales services on a commission only basis first so that you get a better understanding of the market and whats involved before jumping in at the deep end and wasting your time, money and energy on this.