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IR35: How engagers are minimising risk

Following the publication of the draft legislation for the off-payroll rules to apply in the private sector, those who engage contractors via a personal service company are starting to consider how they will proceed when those rules take effect in April 2020.

5th Feb 2020
Independent employment tax adviser
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For those engagers who believe their contractors will be caught under IR35, there appears to be reluctance by both parties to bring the contractors on to the payroll.

However, the contractors could be concerned that this will leave them exposed to additional tax retrospectively.

Not on engager’s payroll

To avoid absorbing contractors on to their payroll, some engagers are leaning on agencies and umbrella companies to undertake the formal engagement of the contractor, and to deal with the payroll and other employer responsibilities.

Taking this approach leaves the end-client engager at risk if the agency given this responsibility (the ‘intermediary’) fails to operate PAYE and NIC correctly on payments made to the contractor.

Therefore, the end-client should consider what process it will adopt to minimise any possibility of failure by the intermediary to comply with the rules. It may be difficult to set tests which can give full comfort to the engager without leaving an element of risk.

What intermediaries are doing

There are still regular instances of flaws in how umbrella companies are proceeding. We’ve seen examples of umbrella companies used to minimise the income loss to contractors switching from a personal service company into an umbrella facility.

Examples seen within recent weeks include:

Contractors are being partly reimbursed via payroll with the use of a loan scheme for the balance of monies due which is paid gross. This is despite the position of such schemes having been clearly set out by HMRC as tax avoidance, and significant steps taken to recover underpaid PAYE and NIC in regard to prior years.  

Steps have also been taken to introduce a contract between the contractor and the umbrella provider which suggests there is no “supervision, direction or control” (SDC)  ‘ exercised on the contractor by another person in the supply chain.

If there is no SDC exercised in the arrangement then it is possible for the contractor to claim travel and subsistence expenses free of tax, which would not arise if there was SDC in place.

This leaves the umbrella provider with a contractor in a financially better position than if directly employed. Clearly it is fine if there is ‘no SDC but if this is not the case, a loss of income tax and national insurance will arise

We have seen a number of umbrella companies engage the contractor. But rather than pay the contractor via the payroll they have engaged them via their personal service company and then suggest the contract falls outside of IR35. HMRC has challenged these arrangements but they are still being used. By now, HMRC would have obtained a judgement at the first tier tribunal, but this has not happened yet.

Clearly, if an umbrella company adopted such an approach and HMRC believed a loss of income tax and national insurance to arise, then we can expect the end client to be in the frame to settle that liability together with interest and penalties.

What's next?

Many end clients are considering the changes to their systems, and whether these leave them with any concerns under their Senior Accounting Officer (SAO) rules. Given the arrangements in place to which they are a party, the end clients also need to consider whether they make a disclosure under the Criminal Finances Act 2017.

It goes without saying that those engagers need to take care and ask specialists to ensure they are not exposed.

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Replies (10)

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By Payroll Pete
05th Feb 2020 10:26

How engagers are minimising risk? Blanket bans on PSCs.

Engagers are leaning on intermediaries as well - I know of one bank who gave all their contractors the choice of go umbrella or go home, and then forced their consultancies to do the same with their contractors.

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Replying to Payroll Pete:
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By C Graham
05th Feb 2020 14:02

I know of another just recently that had a whole dept of contractors - and lost them in almost a day because they refused to deal with the IR35 problem. A problem it is.

IR35 was and is still a crazy idea. No one actually benefits.

It has cost HMRC more than it ever made in their failed legal cases. As antiquated as being locked into long office leases compared to co-working flexible spaces.

Companies need flexibility without employer obligation - contractors want flexibility at the price of losing employment benefits.

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Replying to Payroll Pete:
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By silverghost
06th Feb 2020 17:35

This week a PSC contractor client, who had worked on systems in the banking sector, had a bank ring him to ask if he was available and how much he would want. He cranked up his daily rate by 40% to allow for umbrella costs - this being the only way they would engage him. They said yes.
Clearly they were having trouble in obtaining contractors - exactly what happened in the public sector. It won't be too many months before the extra costs persuade them to take a different view on IR35.

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By ireallyshouldknowthisbut
06th Feb 2020 09:14

We have found almost all of our contractors are getting fired, and rehired on new contracts under IR35 on a blanket approach.

Which I guess is what the government wants, but there are lots of my clients who I would have said are outside of IR35 getting caught up in this over-reaction from business who don't understand IR35 and not even bothering to assess it.

Some of the net to nets I have seen have been shocking. Yesterday I saw one where the guy on £150k was given a full PA in the comp! They couldn't get the ER's NI right either, and were deducting expenses.

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Replying to ireallyshouldknowthisbut:
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By C Graham
06th Feb 2020 10:06

But are they getting full employee rights (paid holiday, sickness, pension etc) because this is simply a breach of their rights if they are treated like employees for tax but not for the other benefits? let along they probably still keep their PSC running

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Replying to C Graham:
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By Payroll Pete
06th Feb 2020 11:52

Standard umbrella treatment - deduct holiday pay, and then give it back, statutory sick, basic auto enrolled pension (which they can back out of after a week)- all deducted from the contractors gross (old) rate.

So they lose out by having to pay full NI, employers NI, apprenticeship scheme levy.

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By C Graham
07th Feb 2020 12:41

inside IR35 = not having your cake and not eating it

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By C Graham
07th Feb 2020 12:41

inside IR35 = not having your cake and not eating it

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