Important IR35 changes to off-payroll working in the private sector
The IR35 off-payroll reforms came into force in the public sector in April 2017, and the Government announced in Budget 2018 that they would be rolling out these IR35 reforms to the private sector in April 2020. However, due to Covid-19, the private sector IR35 reforms have now been delayed until April 2021.
Although the client is solely responsible for determining whether or not your role falls inside or outside of IR35, we are here to support you through this process and answer any questions or concerns you may have.
We are taking robust measures to ensure the new legislation causes as little friction as possible. This includes:
- Offering you ongoing access to PAYE, umbrella and PSC options where necessary to ensure you can select the right payment option for you
- Working in close conjunction with our clients to investigate whether these changes will impact your take-home salary
- Ensuring our teams have been trained sufficiently to get you the answers you need and can find you the best solutions based on your requirements
- Working diligently to keep you well informed regarding all upcoming changes
For more information, please see our FAQs below, or speak to your dedicated consultant at A&E Agency or reach out to our team at firstname.lastname@example.org
What is IR35?
The UK's IR35 legislation is a set of tax laws that are designed to ensure that contractors pay the same Tax and National Insurance contributions as an equivalent employee.. There are a series of tests used to determine the tax status of contractors working through personal service companies (PSCs).
IR35 is not a new set of tax laws. The reform will bring the private sector IR35 in line with the public sector, where the reform was implemented in 2017. As of 6 April 2021, companies in the private sector will be responsible for determining the IR35 status of workers.
Only work completed on or after this date will fall under the new legislation. Anything worked up to and including 5th April will still apply under the old rules.
Who decides if I am in or outside of IR35?
The status of your role is determined by the client. This is assessed on a case by case basis by the hospital or client in question.
What happens if my role is inside IR35?
IR35 can affect the way you operate your business. If your contract is found to be inside IR35, you will not be able to benefit from the same tax efficiencies than you otherwise would.
If you’re a contractor who’s ‘inside IR35’, HMRC sees you as an employee and therefore subject to income tax and National Insurance, just as employees do. You don’t face this if you’re ‘outside IR35'.
How is your IR35 status determined?
HMRC’s complex test considers a number of factors when looking at your contract, including:
- Control - how much control does your client have over your working conditions?
- Substitution - do you have a replacement to undertake your work in the event that you cannot fulfil your duties?
- Mutuality of obligation - are you required to complete a specific task or is their scope for your client to ask you to perform additional duties?
In April 2021, the responsibility for determining IR35 status in the private sector is shifting from contractors to end-users/clients.
Everything you need to know about Umbrella companies
What are umbrella companies?
An umbrella company is a company that employs contractors who work on temporary contract assignments, often through a recruitment agency. It offers the flexibility of being a contractor working on numerous assignments along with all the stability and benefits of being an employee.
From a contractor’s perspective, umbrella employers provide you with full employment rights, all statutory benefits including holiday pay, maternity pay, paternity pay, sickness pay, pensions, and adoption pay.
A contractor is an employee of his or her chosen umbrella employer and with that relationship comes a responsibility for the umbrella firm to provide HR support to its contractors, in the same way as any employer.
When it comes to pay, umbrellas consolidate this from multiple hirers into one single pay packet. This is particularly important for anyone who gets called to work at short notice, at different locations for different clients on different days. Rather than lots of separate pay packets, just one payment takes care of it all so that contractors can simply get on with their work.
Is IR35 a concern when operating through an umbrella?
No, an umbrella firm is a contractor’s employer and therefore a contractor is an employee. IR35 is only applicable to self-employed contractors working through an intermediary, usually their own personal service company. By virtue of being employed by the umbrella, there is no IR35 status to be concerned about.
What risks do non-compliant umbrella schemes pose to contractors?
Since the new off-payroll legislation hit the public sector we have seen a proliferation of schemes that aggressively target professional contractors to sell their product of higher take-home pay. Sometimes, these schemes label themselves as “umbrella”, but they are not umbrella at all. They “work” by paying a small portion of contractors’ earnings via PAYE and then disguising the remaining larger part of a contractor’s income as something else, often an offshore loan. Other examples include shares, annuities, employee benefit trusts and capital advance schemes. HMRC regularly issues Spotlights to warn about tax avoidance schemes, which you can find on their website
Most of these schemes will simply result in significant future tax bills once HMRC catches up with you. Anything that sounds too good to be true most probably is.
Will a contractor be held liable if the scheme is non-compliant?
Anyone joining a non-compliant scheme is likely to end up personally liable to pay their tax and NICs that would have been due on the disguised income, and any unpaid monies soon adds up.
By using such a scheme, individuals are putting themselves at very significant financial risk personally and HMRC will backdate any charge for unpaid taxes to the date that they signed up to the scheme. With any fines and interest added the tax bill could potentially be very large.
Contractors will be all too aware just how damaging the loan charge has been and what a devastating impact it has had on the lives of many innocent contractors who were unwittingly lured into toxic schemes. Such schemes need to be shut down once and for all before more damage is done.
Thousands of contractors are now facing the reality of the loan charge
The BBC recently published an article about a contractor who had previously used a company to manage his admin and tax affairs – although unbeknownst to him at the time it was, in fact, a tax avoidance scheme.
John, as he has been named for the article, is one of an estimated 50,000 people who have been caught by the controversial loan charge. As a result, thousands of people like John are now under immense pressure to repay significant tax bills from using these tax avoidance schemes.
How do contractors spot non-compliant schemes?
HMRC’s official guidance warns contractors to check the following to see if you may be engaged by a disguised remuneration scheme:
- The company promises that you can keep 80 - 95% of your income and be tax compliant
- Only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on some of your income)
- You are paid using a loan, credit or investment payment and the company claims this isn’t subject to income tax or National Insurance contributions (this is tax avoidance)
- The payment from your umbrella company is routed through various companies before it comes to you and comes in various separate payments instead of one
- You’re told you do not have to declare the scheme to HMRC
In essence, the key message is to ensure that your chosen umbrella pays 100% of your income through PAYE. Any business that splits your income so that it isn’t all taxable or offers an unrealistic level of retained income is unlikely to be doing so compliantly with UK tax regulations.
What should contractors do if they’re unsure of a scheme’s compliance?
The simplest thing to do is to change to another provider which will pay 100% of your income through PAYE. Don’t forget that a lot of the schemes have very convincing marketing literature, and at first glance might appear to be genuine investment opportunities. Some will state that they have tax counsel opinion that their arrangement is compliant, or that they fall out of the scope of tax avoidance.
Whatever their claims, a healthy level of scepticism is probably wise. There is simply no reason to enter into contrived arrangements which seek to reduce your tax bill. Surely it is far simpler, and less stressful, to choose a provider that pays 100% of your income through PAYE. That way you don’t have to worry about large future tax bills.
What should a contractor do if they realise they’ve been working through one of these?
HMRC advice states that any contractor who thinks they may be involved in an arrangement that is promoting tax avoidance should withdraw immediately and settle your tax affairs. To speak to someone about getting out of avoidance, contractors can email: email@example.com.
Is there a stamp of approval for contractors to look out for?
Umbrella firms have been in existence for some 20+ years and it would be advisable to choose a compliant umbrella firm that has a good track record. Look out for the FCSA Accredited Member seal of approval. To achieve FCSA accreditation, applicants, i.e. accountants and umbrella firms, must undergo a rigorous assessment of their business services, operations, policies and processes, all of which are independently examined to ensure adherence to published FCSA compliance standards.
FCSA assessors are themselves regulated accountants and solicitors, which means they can only recommend a “pass” if it is genuine. FCSA only appoints assessors who are leading experts in our sector.
A true umbrella will:
- Employ you
- Give you all statutory rights & benefits of employment (holiday pay, sick pay, pension etc)
- Give you the flexibility to work for numerous different end-hirers
- Consolidate your pay from numerous hirers into one pay packet
- Process the full amount of your gross pay through PAYE
Pre-approved umbrella companies
Please see below the umbrella companies on our preferred supplier list; these are all pre-audited companies who we can confirm are legitimate and compliant with HMRC. If you have any questions then please don't hesitate to get in touch with us. For further information on umbrella companies, including how to spot non-compliant firms and contractor liabilities, please click here.
Titan Recruitment Solutions LTD (no website)
False self-employment legislation
Limited company and umbrella contractors are outside of the scope of the False Self-Employment legislation, which mainly targets the self-employed who avoid employment taxes. The Onshore employment intermediaries: false self-employment legislation was introduced in the 2014 Budget and came into effect on 6 April 2014. Its intention ensures that recruitment agencies hiring self-employed workers who are really employees on behalf of clients deduct income tax and National Insurance Contributions (NICs) from gross pay at source.
The test of false self-employment requires the agency to prove an absence of supervision, direction and control of the worker by the client. If any element of supervision, direction and control is present, then the legislation applies, and the agency must deduct income tax and NICs.
The agency must prove the absence of supervision, direction and control
It is the agency’s responsibility to assess whether there is any supervision, direction and control by the client over the worker. HMRC assumes that supervision, direction and control is present, and it is the agency’s responsibility to prove it is not.
Under the rules, the agency must automatically deduct income tax and NICs from the workers gross pay as if they were an employee. The rules also apply if the “individual personally provides or is personally involved in the provision of services”.
That means that even if there is a substitution clause and a worker uses someone else to do some or part of the work, because they elected and paid the substitute it qualifies as being “personally involved” in providing the services.
No conflict with IR35
The false self-employment rules operate independently of and in parallel with IR35, so the classic tests of employment and principles of substitution, control and mutuality of obligation still apply to limited company contractors.
Contractors already inside IR35 and either paying themselves a full salary or a deemed payment are already paying income tax and NICs, and so the legislation would not apply.