IR35 changes – Maintaining a compliant supply chain

With the IR35 Reforms due to take effect in the UK private sector on the 6th April 2021, there has been a lot of speculation about the increase in the use of umbrella companies.

The decision to defer the IR35 changes earlier this year came as a massive relief to many organisations within the temporary labour supply chain. In our article, IR35 – deferred, not defunct! Workr Group outlined how this relief is likely to be shortlived with the reforms almost certain to take effect in 2021.

However, the deferral of the IR35 changes did give a clear indication of the strategies that contract users are likely to take in response.

Responses made in preparation for the original April 2020 IR35 changes indicated that many large scale engagers took an ultra-cautious, although potentially misguided approach.

Policy changes regarding the utilisation of contractors supplying their services via an intermediary (personal services company or Limited Company) or blanket statements determining all contractors as being caught by IR35, appeared prominent. Our previous article IR35 Changes – Blanket Statements Uncovered outlined some of the risks involved in these approaches.

As a result, the Umbrella company solution has been promoted as an alternative by those suppliers under pressure to retain their temporary labour business.

What is an Umbrella Company?

An Umbrella Company will employ a contractor in a similar way to any other employer. The contractor is a permanent employee engaged in working on a number of assignments. They are provided with a Contract of Employment under the Employment Rights Act 1996, granting full employment rights.

The umbrella company contracts with the client or agency and takes care of all the administration matters.

Umbrella companies are used by many contractors because they provide a simple, cost-effective and flexible operating structure.

All income is paid out through the PAYE tax system.

The umbrella will take care of all the administration, tax and payroll work for the contractor — providing insurances to cover the contractor working on an assignment.

The IR35 legislation does not apply to contractors engaged through an umbrella company, making the option more appealing to engagers.

How does the umbrella solution impact engagers?

The removal of the IR35 legislation, and it’s associated responsibilities, is likely to be an attractive proposition for engagers.

However, engagers presented with an umbrella solution should seriously consider the consequences before committing.

Whilst the umbrella solution appears to be the perfect diversion around the IR35 roadblock, there are still risks and responsibilities that the engager cannot relinquish.

Any engager making mass IR35 determinations or blanket statements, or enforcing an umbrella only policy, risk alienating themselves from the talent pool of contractors that legitimately provide their services through a personal service company.

Attracting and retaining top talent is already tricky enough, but contractors are far more likely to be attracted to engagers that offer a fair and considered IR35 determination process.

What are the risks to engagers of utilising an umbrella solution?

First and foremost, the engager still has a responsibility for ensuring that its temporary labour supply chain operates compliantly.

The engager must demonstrate that it has taken reasonable care in the construction and management of its supply chain. Considering reasonable practical ability and competence, this includes ensuring that tax and national insurances are administered and paid correctly.

Failure to demonstrate reasonable care could result in HMRC transferring debts up the supply chain to engagers where taxes are unpaid.

Whilst the umbrella solution is well established, and many providers have operated it compliantly for many years, there are still regular examples of umbrella models that represent tax avoidance schemes in the eyes of HMRC.

Engagers must be confident that such uncompliant models are not being practised and utilised within their supply chains as the financial and reputational risks could be substantial.

What should engagers look out for with umbrella solutions?

A compliant umbrella company should operate in line with UK tax law with contractors becoming employees and income being treated as employment income and taxed via the PAYE scheme. It will provide the contractor with statutory holiday and sick pay entitlements and is also likely to offer additional benefits such as healthcare and insurances.

Engagers should also look out for accreditations to bodies such as the Freelancer and Contractor Services Association (FCSA) –, a self-governing body for umbrella companies that conducts regular and robust audits of its members, Workr Group included.

Umbrella schemes operated by providers with FCSA accreditation are assessed and investigated thoroughly to ensure compliance.

However, there are hundreds of providers in the umbrella marketplace, many operating without governance or accreditation. Subsequently, there have been many examples previously of schemes advertised as umbrella arrangement that, once inspected more closely, have elaborate payment arrangements that do not conform with UK tax law.

In particular, a more recent example has been exposed and labelled as the Mini Umbrella Company or MUC. In this case, hundreds of small limited companies are set up to exploit small business incentives such as the flat rate VAT scheme and the Employment Allowance.

In some cases such as the MUC, even the contractors are unaware of the structure of the umbrella model under which they are employed. It is easy to see, therefore, how difficult it can be for an engager to spot an illegal umbrella model.

What should engagers do now to ensure a compliant supply chain?

We encourage anyone with a responsibility for a temporary labour supply chain to ensure that your due diligence process for checking compliance in the supply chain, is fit for purpose and meets HMRC’s reasonable care requirements.

Whether you engage contractors that provide services via a limited company or are employed by umbrella companies, there are significant risks involved.

Taking a robust, right-first-time approach to supply chain compliance will give peace of mind and confidence to all stakeholders in the process.

HMRC strongly recommends that engagers seek professional advice and assistance in effectively managing the temporary labour supply chain.

At Workr Group our specialist team can offer impartial advice and assistance with all aspects of your supply chain, including our Umbrella solution – Workr Umbrella and our leading compliance service Workr Compliance.

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