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.
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.
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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Alastair is a leading expert on employment tax, IR35 and international fleet issues. He has considerable experience of all aspects of company car taxation. He is still heavily involved in issues relating to employee car ownership schemes and salary sacrifice.