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HM Revenues and Customs (HMRC)’s IR35 reform has garnered a lot of criticisms. The Association of Independent Professionals and the Self Employed (IPSE) has advised the government to support the contractors and avoid extending the off-payroll working rules to the private sector.
According to the policy development manager of IPSE, Jordan Marshall, the IR35 reform will result in overtaxing of hardworking contractors. Moreover, it will place an increased administrative burden on the businesses.
Marshall has said that the Government needs to do more to ensure that its claim to being small business friendly is not an empty promise. He had cited the Government’s planned increase in the National Insurance Contributions last year that was withdrawn after pressure from business groups, Conservative MPs, and agencies such as the IPSE.
Instead of supporting the 4.8 million self-employed individuals in the UK, the present Conservative government appears to be viewing them as a cash cow that should be milked to increase profit. In the past one and a half year, the Government has increased the likelihood of reduced VAT threshold, reduced dividend tax allowance, and pledged to remove Class 2 NICs that benefited self-employed traders.
According to Marshall, the punitive approach against the contractors and freelancers wasn’t always the case. The coalition with the Liberal Democrats and Conservatives had created a business-friendly environment. The Corporate Tax rates were attractive that provided an innovative push to the economy. Furthermore, the coalition Government had taken firm measures to ease the hardship faced by small businesses and sole traders due to late payments by appointment of a Small Business Commissioner.
Government Need to Support Contractors and Small Businesses
The current Conservative leadership has ignored the role played by contractors and small business owners in the economy. The proposed IR35 reform in the private sector will have grave repercussions on the economy, according to Marshall.
The government should do the right thing by getting rid of the reform. It should consider the consultation responses and criticisms and scrap the reform. This is in the best interest of not just the contractors and small businesses but also the Government.
Although at the moment the scenario remains a Utopian dream, the IPSE has stated its resolve to put pressure on the Conservatives to support the economy. The agency will persuade the Government to offer support to freelancers, small businesses, sole traders, and contractors. To this end, the agency is advising contracting professionals to write to their respective MPs to end IR35 for the good of the country.
Mel Stride, The Financial Secretary, Claims Accuracy of the CEST Tool Despite Criticisms Sep 18, 2018
Financial Secretary Mel Stride had responded to criticisms relating to the Check and Employment Status for Tax (CEST) tool. The response was given in the House of Commons last week. The message was not unlike the one is given by HM Revenue and Customs (HMRC) that there is nothing wrong with the tool.
According to Mr. Stride, the CEST tool was tested rigorously during the development stage in accordance with the data standards of the government. It was built after getting input from the external shareholders. The accuracy of the tool was checked as part of the process and the results have been verified by HMRC against settled cases.
In addition, Mr. Stride also stated that HMRC will consider results of CEST as valid given the information entered is in line with the guidance. He said that the tool gives the right results in 85 percent of the cases. In case of a dispute, contractors can contact the dedicated helpline that is staffed by HMRC to provide further guidance.
The Reality of HMRC’s CEST Tool
The reality is that following guidance of HMRC is not as easy as it seems. There are no instructions as to how to know whether the guidelines are followed when using the tool.
The most important criticism regarding the CEST tool is that it ignores the Mutuality of Obligation (MoO). HMRC has used the wrong assumption that MoO is present in every contract, which is not true.
For instance, in the First Word Software V HMRC case in 2003, it was noted by the Special Commissioner that Mr. Atkins would not be given other jobs once the Project Leapfrog was completed. Evidence shows that when the project is complete, the arrangement will have terminated. The MoO must be present for a contractor to be deemed as an employee.
Of the three key employment tests viz MoO, control, and substitute work, CEST tool only considers the last two. MoO is totally ignored resulting in wrong assessments.
Moreover, CEST has not been tested in recent cases as suggested by Mr. Stride. The latest case the CEST tool has been tested was heard in 2011 relating to ECR Consulting Ltd.
HMRC has not clarified why it has considered only certain tax cases, and not against significant cases such as Jensal Software and MDCM Ltd or CAM Ltd. Perhaps it may be because testing the tool in such cases would provide information that HMRC does not want the public to know.
BBC presenter Christa Ackroyd has filed an appeal against the IR35 verdict. On September 2017, the tribunal had given the verdict that her work was inside the IR35 rule.
Ms.Ackroyd had worked as a BBC presenter for the regional TV news programmes BBC Look North and Calendar from 2001 to 2013. She currently faces an employment tax bill of up to £419,000 after losing the court case with HM Revenue and Customs (HMRC).
The current online listings in the Upper Tribunal shows a pending case of ‘Christa Ackroyd V HMRC’ with the case number UT/2018/0082.
Jolyon Maugham, QC, who will represent Ms. Ackroyd, has criticised the BBC for having profited from her Personal Service Company (PSC) for six years. During the appurtenance to the DCMS Select Committee, the legal professional had picked statements of the BBC on the usage of PSC that it had requested to be published.
One of the potential grounds of appeal is that the BBC was directly contracting the presenter. As a result, the intermediaries legislation does not come into play.
Another ground for appeal relates to the ‘control’. Being bound by the editorial guidelines of BBC does not mean that Ms. Ackroyd was an employee.
The appeal represents two out of a total three areas that that IR35 experts have pointed out that Ms. Ackroyd did not make an argument on to the First-tier Tribunal (FTT).
The third area that includes Mutuality of Obligation (MoO) may be a disputed point if the tribunal is influenced by the submission of HMRC in July that it is always present in a contract.
Ms. Ackroyd’s Chances of Success in Appeal against the IR35 Verdict
According to tax specialist Qdos, there were a number of additional points relating to Ms. Ackroyd’s case that indicate that her work was similar to an employee. The factual pointers against the former BBC presenter are dimmed to be ‘strong’.
However, Mr. Maugham’s recent tweet implied that he was confident about the success chances of her client. His statements suggest that other workers who shared her work factors will also be affected by the outcome of the case.
Citing a Times’ article, Mr. Maugham had stated that he believed that there are serious problems ahead for employers who use PSCs to shield from tax liabilities. The outcome of the case is expected to take about three months after the hearing.
HM Revenue and Customers (HMRC) should address rights of contracting professionals deemed inside IR35 before further reform in the off-payroll working rules. This has been recommended by the leading tax advisory firm, Qdos Contractor.
According to Kate Cox, a spokesperson of Qdos Contractor, HMRC should give employment rights to contracting professionals if they operate inside IR35 and pay taxes. There are various cases that display HMRC’s clear disregard for employment rights when determining IR35 employment status.
The highly publicised case of the BBC TV presenter Ms. Christa Ackroyd, the presiding judge had noted that she was not entitled to holiday pay, sick pay, pension rights, maternity pay, and other employee benefits. This was because BBC had made a contract with her personal service company Christina Ackroyd Media, or CAM Ltd, instead of engaging Ms. Ackroyd as an employee.
HMRC seems to be splitting moral hairs when it comes to IR35 determination. The CEST tool that is used to determine employment status simply ignores employment rights. If a contracting professional has to pay taxes, then he or she should also be given employment rights. Deducting taxes without providing statutory employment benefits to contractors who are deemed to be inside IR35 is flagrant abuse of employee rights.
In the tribunal case involving IT contractor Ian Wells, the tribunal had explored the contractor’s integration with the client organisation. The presiding judge noted that the Mr. Wells did not have any managerial responsibilities and that due to the short tenure of employment, he cannot be considered as an employee since he was engaged on an on-the-need basis. No site-specific facilities or benefits were provided to the contractor while engaged through his PSC, Jensal Software etc.
Contracting professional should be provided employment rights similar to regular employees prior to deducting any taxes. The contractors who are considered inside IR35 and have tax and NIC contributions deducted on a PAYE basis at source should receive full entitlements to rights and benefits.
The Matthew Taylor report had emphasised about employment rights. Providing employment rights has been the main features in the modern work practices. However, the government has not responded to the recommendations of the review. This matter needs to be resolved with urgency before making any further reforms in the off-payroll working rules. The tax regulation agency needs to create legislations in order to protect and promote employment rights of contracting professionals.
Labour will promise to ‘restore the balance’ of power in the workplace in a major shake-up of workers’ rights. John McDonnell said a Labour government would give gig economy workers more rights, including sick pay and parental leave. The shadow chancellor said the move would benefit millions and offer workers protections against unfair dismissal.
In a speech to the TUC Congress in Manchester today he will criticise the Government’s Taylor Report into employment for ‘ignoring’ trade unions. He will say: ‘Even if the Government adopt every positive recommendation in Taylor, it will not be enough because the most effective way to improve the lives of working people is through trade unions and collective action. ‘Just because you don’t work regular hours doesn’t mean you can afford not to work when you are sick. ‘Just because you work several jobs doesn’t mean you can afford to lose one of them without warning. ‘Just because you value the freedom of independence or the convenience of flexibility doesn’t mean you have to forgo basic rights.’
Mr McDonnell will say that the burden of proof should be shifted so that the law treats gig staff as workers unless the employer can prove otherwise. He will add that the Conservatives have stripped back employment rights to a level not seen since the economic depression of the 1930s. ‘The role of Conservative governments throughout history has been to restrict and restrain the rights and influence of workers to maximise the profits of the companies that so generously fund their party,’ he will say. ‘The Conservatives try to dress it up as securing some form of balance of power between workers and employers, but few today can argue that the balance hasn’t been overwhelmingly tipped against workers.
Unions have taken a series of cases to employment tribunals to improve the rights of gig workers such as couriers. Mr McDonnell will say that workers also now have little say over the key decisions taken by their employers over the future of their companies. ‘Labour’s programme of workplace reform will restore the balance between employer and worker with a significant extension of trade union rights, modernising corporate governance structures and extending the opportunity for employees to share collectively in the benefits of ownership of their company.’
HM Revenue and Customs (HMRC) has suffered another blow relating to its off-payroll working rules. In a recent tribunal case, the presiding judge Ms. Sarah Falk had given the verdict that the professional football referees were not employees but contracting professionals.
HMRC had brought a case against members of the Professional Game Match Officials Ltd (PGMOL) regarding PAYE tax and NI contributions. The tax authority had alleged that PMGOL incorrectly assessed a group of 60 football referees as independent contractors when in fact they were its employees. As a result, it had argued that the referees who had been officiating for three seasons between 2013 and 2016 should pay backdated tax and insurance contributions.
Verdict Goes Against HMRC
The defending counsel was able to successfully convince the tribunal judge that the referees should be classified as contracting professionals since the contract with PMGOL lacked two critical points for employment — Mutuality of Obligation (MoO) and control.
Judge Falk had agreed with the case made by the defence counsel stating that the referees were asked to officiate the football matches in return for a free instead of a contract of service.
This is yet another example of HMRC’s failure to grasp the importance of MoO in determining employment status. The tax authority wrongly assumes MoO to be present in all contract. That’s the reason that its Check Employment Status for Tax (CEST) tool ignores this critical factor when determining employment status.
According to a specialist at Qdos Contractor, the MoO is present in every contract but it’s absent during the actual agreement. As a result, the contractor and the end client are not under any obligation to continuework relationship. The arrangement clearly represents self-employment due to which the contractors should not be deemed inside IR35.
The Association of Independent Professionals and the Self Employed (IPSE)’s Deputy Director of Policy, Mr. Andy Chamberlain, had opined that the MoO and control of PGMOL over referees’ engagement was absent in the agreement. This was seen by the tribunal as a clear evidence of the absence of an employer-employee engagement.
According to Mr. Chamberlain, HMRC’s misunderstanding of the critical employment characteristics is the reason that it has now lost three out of four tribunal cases. The IR35 rules are confusing that has created difficulties in assessing employment status. In order to remove the confusion, Mr. Chamberlain has stated that the Government needs to provide a clear definition of self-employment. This will resolve the problem in determining the employment status thereby saving taxpayer’s money since a court resolution will not be required.
27 cases involving the UK’s biggest businesses (top 2,0000 companies) were referred for investigation for possible ‘serious’ tax evasion by HMRC in the last year, says Pinsent Masons, the international law firm.
The law firm says that if the numbers, based on a disclosure from HMRC, are correct then it will come as a major surprise as big businesses have been under such intense pressure over the last decade to avoid legal tax avoidance, let alone be tempted into illegal tax evasion.
Jason Collins, Partner at Pinsent Masons, says: “These are very high figures of suspected tax evasion amongst the biggest companies in the UK. However, HMRC suspecting serious tax evasion has taken place is not the same as it actually having occurred.”
The new corporate criminal offence of the Criminal Finances Act 2017 means that big businesses can be held criminally liable if they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion, including potentially the group’s own taxes.
Pinsent Masons adds that recent tax evasion cases involving both UK and European large companies have been largely restricted to the financial services and professional services sector – for example, private bankers helping facilitate evasion by their clients. Outside of the UK a European energy company has recently been accused of evading tax by miss recording sales of certain products.
A planned tax cut for millions of self-employed workers has been scrapped by Chancellor Philip Hammond.
The Treasury revealed on Thursday it will no longer abolish Class 2 National Insurance contributions (NICs).
Mr Hammond's predecessor George Osborne had announced the move in 2015, with the Treasury estimating at the time that 3.4 million people would benefit from an annual tax cut of £134 on average.
Class 2 NICs are payable by those who earn profits of £6,205 or more per year. At the current rate of £2.95 per week, they now cost about £150 per year.
The Treasury previously estimated the tax cut would cost the exchequer around £360m per year, meaning Mr Hammond now has hundreds of millions of pounds extra in the national coffers.
It comes at a time when he is considering how to fund a government pledge to set aside an extra £20bn a year for the NHS by 2023.
The abolishment of Class 2 NICs was due to occur in April this year, but was delayed for 12 months by Mr Hammond in November last year.
The Treasury explained the year-long delay by saying the government wanted to "ensure that there are no unintended consequences for the lowest paid".
Treasury minister Robert Jenrick has now announced the complete scrapping of the tax cut, highlighting concerns about self-employed workers' pensions.
"A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the state pension rise substantially," Mr Jenrick wrote in a statement to MPs.
"Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society.
"Furthermore, it has become clear that, to the extent that the government could address these concerns, the options identified introduce greater complexity to the tax system, undermining the original objective of the policy.
"The government remains committed to simplifying the tax system for the self-employed, and will keep this issue under review in the context of the wider tax system and the sustainability of the public finances."
Labour's shadow chancellor John McDonnell accused the government of "yet another betrayal of the self-employed".
Business groups also reacted with anger to the announcement.
Mike Cherry, national chairman of the Federation of Small Businesses, said: "The self-employed community has been let down today, missing out on a promise to reduce their tax burden."
Zero-hour workers are not guaranteed fixed hours of work nor are they obliged to accept a particular number of hours. Unless specifically written in the contract, businesses cannot suspend a zero-hour employee for disciplinary reasons without suspension pay.
In addition, zero-hour workers cannot be prevented from getting other work when employed under the contract. If they are not paid during the suspension period, the workers may sue the business for not providing statutory employment rights.
A Tribunal Case regarding Zero-hour Work
A recent case in the UK highlights the importance of businesses to ensure the provision of statutory rights to zero-hour workers.
A zero-hour worker had sued an Indian restaurant named Rice Shack for not providing her suspension pay. The worker had worked in the food outlet from December 2015 until she was suspended for disciplinary reasons in March 2016.
Although zero-hour workers are not guaranteed fixed hours, she normally worked around 15 hours per week at the rate of £6.70 per hour. After an altercation, she was suspended without any disciplinary hearing.
Despite the fact that her employment contract did not contain any provision for suspension without pay, the owner suspended her without paying the suspension pay.
The worker submitted a grievance with the company on May 2016 protesting against not being given the suspension pay and also not being offered work even when she was willing. While a hearing was held, the matter was not resolved in the meeting.
The worker got another job in August 2016 in a call centre company that she joined without informing Rice Shack. On December 2016, Rice Shack offered the worker further shifts, but she had turned down the offer as she was already employed.
The Employment Tribunal (ET) heard the case and concluded that the end date of employment was December 2016 when the worker had turned down the offer, and not March 2016 when she was suspended. So, Rice Shack was ordered to pay for 40 weeks average pay from March to December 2016.
According to the ET, the zero-hour worker’s suspension duration had continued since Rice Shack did not contact the worker regarding the disciplinary process.
Rice Shack had made an appeal that the worker should not be given any pay as per section 13(3) Employment Rights Act 1996 as she had started work on August 2016 without informing the company.
However, the Employment Appeal Tribunal (EAT) rejected the appeal stating that under the terms of the employment agreement, the worker had the right to accept other offers without notifying the employer. The restaurant was therefore ordered to give suspension pay to the worker.
Business needs to be aware of the obligation of suspension pay to workers. The workers need not inform the company of joining another firm in case no clause is present regarding this matter in the contract. The worker can also seek and accept other work during the disciplinary suspension period.
The disciplinary issue of zero-hour contract should be dealt with in a manner similar to dealing with regular employees. Suspending a worker indefinitely will not be considered a dismissal. The worker will have to be paid average pay during the duration of the suspension until a definite conclusion is reached.
Not taking care about this slight yet important point regarding zero-hour workers could cost thousands of pounds for the company as was the case with Rice Shack.
The UK Government has recently announced that it would no longer lead the implementation of the “pensions dashboard” project. According to Esther McVey, the Secretary of State for Work and Pensions, the private sector would take the lead role in the rollout of the project.
The aim of the pensions dashboard project was to integrate information relating to pension schemes. The information concerning the state, private and workplace pension schemes would be integrated once the project is completed in April 2019. It will allow pension savers to view available pension from one central location.
While the Minister for Pensions and Financial Inclusion, Guy Opperman, had reassured that the Government would pass legislation to protect the personal information of pension savers, he did not offer assurances that the Government will compel pension providers to reveal comprehensive data. And most importantly, he did not confirm whether the project will also incorporate state pension data.
Criticism of the Government’s Decision by Industry Experts
Experts have opined that the project may fail if the Government does not make a strong commitment towards the project. According to the head of retirement policy at Quilter, Jon Greener, the Government cannot back away from this project since without state-pension data the main ingredient of the project will be missing.
A research by Independent Professionals and the Self Employed (IPSE) published in the article How to Solve the self-employed pension crises show that more than 50 percent of freelancers and contractors trust government data.
IPSE has further stated that the lack of suitable pension schemes for these self-employed individuals is a ticking time-bomb.
The government has a key role to play in solving the pension problems among off-payroll workers, according to IPSE’s Senior Policy Advisor Jonathan Lima-Matthews. That is the reason that the IPSE is ‘bitterly’ disappointed with the government’s decision to back down from the project.
Contracting professionals who work as employees of umbrella companies will not be affected since compliant firms tend to auto-enroll them in pension schemes. But professionals who work through their own limited companies suffer due to unavailability of suitable schemes.
The Government needs to have a role in solving the crises since only 31 percent of contracting and self-employed professionals have enrolled in a pension scheme. The reluctance of the Government to share pension data will create difficulties in developing a pension scheme that serves the need of all contracting professionals.
NHS trusts should rely more on staffing banks instead of the ‘expensive’ recruitment firms. This advice has been given by Ian Dalton, NHS Improvement CEO. The trusts need to adopt a ‘bank-first’ approach to full staffing needs.
NHS Improvement oversees the NHS and foundation trusts. The agency also oversees independent NHS-funded care providers. According to its CEO, NHS trusts could save about half a billion pounds by relying on staffing banks instead of the more expensive recruitment firms.
The executive had said that staffing banks cost less than recruitment agencies. The money saved by relying on staffing banks can be invested in providing improved patient care.
The Importance of Recruitment Agencies
In response to the recommendation of the CEO of NHS Employers, Danny Mortimer, has said that NHS trusts have already achieved a significant reduction in agency spending in the past few years. Better use of technology has allowed the trusts to provide safe services while reducing the net spending on recruitment agencies.
However, the trust can’t completely end reliance on recruitment agencies. Mortimer believes that there are cases when the use of agency is the only option available to the trusts.
Experts say that NHS trusts can cut costs by avoiding off-framework agencies. Reliable agencies play an important role in providing staff that cannot be provided by staffing banks.
According to the chief operating officer (COO) at Positive Health Care, Olivia Spruce, the recommendation that trusts could slash staffing costs is not entirely true. The head of the healthcare staffing firm had said that being a multiframework staffing supplier to the NHS, their profit margins are modest. Their services cannot be classified as ‘expensive’.
That said, the off-framework recruitment agencies charge an exorbitant fee for meeting staff needs on an urgent basis. This has resulted in a market where healthcare workers earn more compared to being associated with a staffing bank or a framework agency.
The director of Your World Recruitment, Greg Wood, has said that recruiters provide staff that is not available in staffing banks. The recruitment agencies deal with transient staffs who move around from one place to another. They support NHS to meet staffing needs by providing temporary staff. This also helps the staffing banks to fill holes and support NHS staffing requirements. While using staffing banks should be preferred, NHS trusts should not completely avoid services of recruiting agencies, as it will help them to recruit skilled staff that staffing banks cannot provide.
Company contractors in the UK are recommended to hire reputable umbrella companies. According to the tax advisory consultancy firm Qdos Contractor, contracting professionals need to take due care in relation to their contracts. This is important to avoid surprised tax liabilities in case of an IR35 audit by HM Revenue and Customs (HMRC).
Steps for Contracting Professionals to Avoid IR35 Trouble
Qdos Contractor has outlined a number of steps for the contracting professionals to avoid unexpected liabilities.
- Qdos has suggested that the contracts should be investigated by an IR35 expert. The expert should be recognized in the off-payroll working rules. This is important as the verdict of the expert will serve as an evidence in case HMRC conducts an investigation. This is a cautionary step that should be taken since recruitment agencies generally issue standardized contracts that may not reveal details of the work. An expert will identify issues and recommend careful rewording to avoid being inside the IR35. The expert may also recommend additional clauses to avoid any issue.
- The second advice by the tax advisory specialist is that contractors should not rely only on contract terms to determine tax status. They need to carefully review the actual working practices to determine the employment status.
- The actual working arrangements will be scrutinized in the event of a formal HMRC enquiry instead of the terms of the contract, which includes interview with the end-client. So, it’s important to directly communicate with the end client regarding the IR35 status.
- HMRC inspector will generally explore different employment status tests. These include Mutuality of Obligation (MOO), the degree of control, and the right of substitution. As a result contractors should assess the employment status in the light of these tests.
- Lastly, contractors need to have their contracts reviewed by a professional. Also, they need to remain in communication with the end client regarding employment status. This will show to HMRC officials that due diligence was taken in finding out the tax status. Not exercising care in this regards to IR35 status could result in severe penalties from the UK tax authority.
The controversies surrounding the public sector IR35 determinations has made it difficult for NHS in finding skilled professionals. According to an article published in the British Journal of Health Care Computing, Dr. Harpreed Sood who is the CIO of NHS England has said that the public sector health system faces a shortage of professionals who can drive the technological and informational change.
Due to the problem of recruiting highly skilled IT staff, the NHS has to rely on externally sourced services. The disruption in IT expertise has been the direct cause of the IR35 reform introduced in April 2017.
The need for IT staff for managing the transformational change was badly felt in May last year when the agency became a victim of a ransomware attack. It was found that most of the staff were not aware that clicking on email links or attachments from unknown sources results in a cyberattack. Also, many were not aware that not updating the antivirus can expose the system to online attacks.
To train the employees to face the threat due to cloud-based technologies, expert IT professionals are required. But the IR35 reform has caused problems due to which many IT contractors are now reluctant to offer their services to public sector bodies.
Disastrous Effects of the IR35 Reform
The IR35 has clearly failed to achieve the targets. Whilst it may have boosted Government revenues in the short term, the reform will likely result in a significant decline in the long term.
The tax reform had shifted the responsibility of determining contractor status from the individual contractor to the engaging recruiter or the end client. As a result, the engagers and employers are required to make tax payments.
Since the reforms were introduced without proper planning and consideration, end engagers were not provided sufficient time to prepare for the reform. Many have resorted to blanket assessment to save administrative burden involved in making their system IR35 compliant. A lot of them have implemented role-based assessments based on work by similar employees, which has resulted in the wrong determination of IR35.
NHS has also been forced to enforce blanket assessments to determine employment status. This was against the official guidelines and totally against the needs to assess job statement based on the contract. So, it’s not surprising that many have decided to leave the NHS. This has contributed to the skilled labour shortage problem faced by the public sector body that will undermine its goal of becoming a part of the future connected city.
The latest research carried out by Qdos Contractor shows that nearly 38 percent of contractors in the public sector were placed inside the IR35 due to blanket determinations. The decisions have been made without regard to working practices. This has led to many contractors being wrongly treated as employees.
Blanket IR35 decisions are not generally confined to a few small public-sector companies. Contractors have complained that many large public firms have resorted to this practice.
The blanket determination has been carried out by the Home Office, MoD, and MoJ. Surprisingly, around 19 percent of the contractors surveyed were associated with HMRC projects.
Blanket Determination are Not Compliant to IR35
Contractors are being placed inside the IR35 without reviewing the actual work arrangements. According to the research report that was carried out to support the Qdos IR35 consultation response, HMRC has been guilty of chasing the maximum amount of tax and not the right tax amount. The blanket decisions are made without taking any reasonable care when determining the contractor’s employment status.
There have been severe criticisms about even the role-based assessments.
The head of the Independent Health Professionals Association, Dr. Ian Campbell, had stated that such assessments are in fact blanket assessment since it’s not possible to assess the financial risks, working practices, and structure of the company. Also, the assessment does not consider the direction and control, willingness to supervision, and many other factors required to determine the employment status.
This concern has also been raised in the Qdos Contractor report where it’s stated that role-based decisions are not accurate since they determine status without taking into account the actual working practices.
Due to severe criticisms regarding blanket IR35 assessment, some public engagers such the NHS have denied as operating blanket determinations. However, according to Dr. Campbell, not a single NHS is supposed to be complying with the off-payroll working rules and many professionals are blanketed inside IR35 without taking reasonable care.
The fact is that public bodies were not given time to adjust to the requirements of the IR35 reform. HMRC is guilty of pushing forward the reform haphazardly without giving time to public bodies to make the reform. As a result, most of them were forced to take the shortcut of the blanket ruling to the determinant of the contractors. This has also exposed them to possible future lawsuits for wrongful tax payments.
The HM Customs & Revenue (HMRC) has published a guidance on 23rd August regarding working with employment agencies and umbrella companies. It has stated that most of these agencies are compliant with the UK tax rules. At the same time, the guidance has also mentioned that there is a minority who through an alleged legitimate tax efficient arrangement try to reduce the contractor’s tax liability.
The Freelancer and Contractor Services Association (FCSA) has welcomed yet also criticised the recently published guidance by the HMRC.
According to the CEO of FCSA, Julia Kermode, the suggestion by HMRC that umbrella firms with a nettake-home pay of 80 percent are likely non-compliant is erroneous. She has stated that while this assertion may be correct, but it’s wrong to refer to them as umbrella companies. This is because they don’t follow the compliance standards that most true umbrella companies do. Instead, companies that are non-compliant are nothing more than disguised remuneration schemes that have the sole purpose of tax avoidance.
Kermode says that true umbrella companies are contractors’ employers. They provide them with all benefits that are given to permanent employees while also allowing flexibility of a contractor. Since these companies process the gross pay through RTI payroll, contractors will not have to face the prospect of a high tax bill later on.
FCSA Warns against Wrong Association
The CEO of FCSA has cautioned that although the HMRC’s guidance was a positive development, it has created a confusion that could make people avoid working with umbrella companies.
The reality is that umbrella companies provide entirely legitimate and valuable services that have multiple benefits to end-clients, agencies, and contractors. Those that engage in tax avoidance strategies are not umbrella companies but elaborate tax avoidance schemes. According to Kermode, the FCSA had warned HMRC that such tax avoidance schemes will increase due to the result of off-payroll reforms introduced in 2017. And this has become a reality today. It’s important for recruiters to make sure that firms in their supply chain do not promote tax avoidance otherwise they could be convicted under the Criminal Finances Act.
The importance of choosing a compliant umbrella company cannot be emphasised enough. Umbrella companies provide invaluable services in meeting demand for skilled professionals. Due to the confusion surrounding the tax avoidance scheme, some companies were alleged to have been avoiding the use of umbrella companies. The confusion should be removed to ensure that umbrella companies continue to play a significant role in the UK labour market.
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