What changed?

In 2017, public authorities became responsible for deciding if the off-payroll working rules applied for a worker providing services through their own intermediary. Then in April this year, that responsibility was extended to include medium and large sized end-user clients in the private sector. If a client is not exempt, it must provide a status determination statement to both the worker and the party it has a contract with. That statement must confirm whether the engagement is ‘inside IR35’ or ‘outside IR35’. If it is an ‘inside IR35’ engagement, the fee-payer (who has the contract with the Personal Service Company (PSC)) must deduct tax and national insurance before paying the PSC. They are held liable by HMRC to make sure the correct tax is collected.  

Earlier this year, a number of technical changes were introduced, from bringing umbrella companies out of scope to strengthening anti-avoidance measures in the supply chain. Despite best intentions, we are not sure how effective some of these changes have been. Technical changes include:

• Correcting the wider definition of an intermediary so that umbrella company workers are not within the scope of the rules. This means the umbrella company should treat the workers as employees and deduct tax and NICs from their pay in the usual way.
• Rules regarding contractors having a non-material interest in the intermediary they work through. This means that the contractor cannot have any shares in the company or receive payment that is not employment income.
• A targeted, anti-avoidance rule applied to arrangements where the primary purpose is to gain a tax advantage by circumventing the rules.
• To make sharing information easier, intermediaries will be obliged to confirm to other parties in the supply chain whether the IR35 qualifying conditions are met; and
• Where fraudulent information is provided, the liability will be moved to the party in the supply chain that provided the fraudulent information.

REC in 2021

As well as continuing to be an active member of the IR35 forum, ensuring our members concerns are heard and addressed on a regular basis, last month, we took the opportunity to send a written submission to the Finance Bill Sub-Committee which was looking into the implementation of the off-payroll rules in the private sector. In our submission, we highlighted a number of concerns, including challenges with HMRC’s CEST tool, which despite some minor improvements, remains incredibly unreliable.

HMRC’s view that mutuality of obligation should not form part of the questions in the CEST tool on the basis that the parties in all assignments have agreed to the contract, does not reflect the reality of the contracting environment. Further, because off-payroll working legislation is complex, it is inevitable that mistakes will be made. The potential inaccuracy of the CEST tool, combined with the subjective nature of the questions in most contexts, results in disagreements between hirers and contractors who must then resort to debating the nuances of what has been established in case law. The Department for Work and Pensions (DWP) owing HMRC nearly £87m for “historic errors” in assessing tax liability for DWP off-payroll workers over the period 2017-21 is a clear example of the flaws with the CEST tool. We have and will continue to advocate for an adequate CEST tool. In our submission, we also raised concerns about the status determination and the unfair predicament that agencies face, potential costs and difficulty recouping any overpayments. For example, the current rules make agencies liable for a status determination that they did not make and where there is an incorrect determination of an “inside IR35” status, that would also mean that additional costs have been wrongly applied to their charge rate - employer’s NICs at 13.8%, VAT which may or may not be recoverable, or the agency may find that its payroll wrongly reaches the £3 million threshold at which point the apprenticeship levy applies. Recovering overpayments from HMRC remains challenging because the legislation does not allow for an offset of tax where there has been an overpayment. Agencies have little or no influence on the tax status decision or employment status of the off-payroll worker but carry a disproportionate compliance burden and liability.   

Whilst we will continue to ensure our members’ concerns are heard, the off-payroll rules are not going away, and although we have made the best of it, without fundamental understanding of the entire supply chain, unintended consequences are inevitable. For example, the introduction and extension of IR35 has resulted in the growth of non-compliant umbrella companies, using disguised remuneration schemes and other tax mitigation models such as joint employment models where umbrellas companies reduce their VAT bill.

Looking ahead to 2022

The government has now published a call for evidence, running until 22 February, on how the umbrella company market operates.  The REC drafted an initial response which is on our website and we hope you will find it a useful guide in developing your own responses. Any feedback members wish to share would be very welcome – you can email us on policy@rec.uk.com to feed in. We will be hosting a member roundtable on the issue with BEIS in January – contact us if you would like to take part.

We have four main asks around the regulation of Umbrella Companies. The REC is not advocating for a ban of umbrella companies as this could well lead to the reinvention of umbrella companies or the creation of alternative entities, meaning HMRC and the REC would have to navigate the unknown and potentially non-compliant again. However, we are advocating for:

1. The introduction of reciprocal employment business/umbrella company obligations to enable more clarity for the worker.
2. Umbrellas should be subject to similar obligations that employment businesses have under the current recruitment industry legislation.
3. Regulation should create transparency around fees/payments taken by umbrellas companies; and
4. Regulation should remove the right for umbrella companies to opt out of the Conduct Regulations.

Another important piece of legislation to look out for in 2022 is the long-anticipated Employment Bill. In December 2019, an Employment Bill was announced in the Queen’s Speech, but it has yet to be published and was notably absent from the Queen’s Speech this year. The government has since indicated that the Bill will be forthcoming “when parliamentary time allows”. It is anticipated that the Bill will be published at some point in 2022. The REC will, of course, keep members up to date with any developments around IR35, umbrella company regulation, and any other upcoming legislation.