Despite the Government promising a review into off-payroll reforms on its return to Number 10, no-one expects any significant changes to be made and fully anticipates the reforms to be rolled out to the private sector come April 2020. It will mean that medium and large businesses will be responsible for determining the IR35 status of their contractors with many already opting to ban the use of personal service companies. There will undoubtedly be an increase in clients, contractors and recruitment agencies opting for umbrella companies, which offer a solution to IR35 status because they employ contractors, and therefore as the contractors are employees they are outside the scope of IR35. But, as Julia Kermode, chief executive of the Freelancer & Contractor Services Association (FCSA), points out, navigating the legislative changes and choosing which umbrella company to work with can be challenging and confusing. Here she offers some advice on what to look for.
As a direct result of the changes to IR35 many contractors:
– Will be deemed inside IR35 and will therefore be taxed accordingly
– Will receive less take-home pay as a result
The changes in the public sector in April 2017 led to an influx of schemes being set up to aggressively target professional contractors with the promise of higher take-home pay. The same is likely to happen in the private sector. The schemes “work” by paying a small portion of your earnings via PAYE and then disguising the remaining larger part of your income as something else, often an offshore loan. Most of these schemes are illegal.
Although these companies are suggesting they can reduce your tax and NICs, in reality you will still be liable for paying them. By using such schemes, contractors are putting themselves at significant personal financial risk. HMRC will usually backdate any charge for unpaid taxes to the date that you signed up to the scheme, and once fines and interest is added then your total tax bill will be extremely large.
The message is clear: Please don’t sign up to any of these schemes!
– Don’t believe anything that they tell you.
– Just because they state they are compliant with HMRC, that does not mean that they are.
– Avoid anything stating “HMRC Approved” as HMRC does NOT approve anything
– They will lie in order to entice you to their scheme.
– They will not support you if HMRC investigates.
– They are deliberately and aggressively targeting susceptible workers who have had their income reduced as a result of tax changes in the public sector
Sometimes these schemes label themselves as “umbrella”, but they are not umbrellas at all, and they are bringing the sector into disrepute. A true umbrella employs the worker whilst giving them flexibility to work for numerous end-hirers – so the worker has an umbrella of employment benefits and rights that they take with them wherever they work. Crucially, an umbrella will always pay 100% of your gross pay through RTI payroll.
Hallmarks of a compliant umbrella firm
Instead of these schemes, please choose a compliant umbrella firm. A true umbrella will:
– Employ you
– Give you all statutory rights & benefits of employment (holiday pay, sick pay, pension etc)
– Give you the flexibility of working 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
In essence, the idea is that you take an ‘umbrella’ of continuous employment benefits with you when you work for various different end-hirers.
Key questions to ask
Before you sign up to any intermediary that will pay your remuneration, consider asking:
– How is my gross pay calculated?
– What percentage of my gross pay will be paid through RTI payroll? (NB, the answer should be 100%! Anything less puts you at risk.)
– Will any of my money be offshore at any stage?
– Does payment involve any loans, shares, annuities or other disguised remuneration mechanism?
– Do you pay my income tax and NICs direct to HMRC when they become due?
– If I change to another company, will I receive a P45 from you?
– Are you an umbrella company? If so, can I see my contract of employment?
– If you are an umbrella company, are you FCSA Accredited?
When you receive your first payslip, check you are being taxed properly. There are lots of online calculators, for example https://www.moneysavingexpert.com/tax-calculator/
Likewise, check your P60 (given to you at the end of the tax year) and your P45 (given when you leave employment) matches what you have been paid, and that you have been taxed properly. The regulations are complex and niche, so it really is worth going to a specialist that will give you best advice for your circumstances.
Written as a guest blog for JustAccounts by Julia Kermode.
Julia Kermode is chief executive of The Freelancer & Contractor Services Association, the UK’s leading professional membership body dedicated to raising standards and promoting supply chain compliance for the temporary labour market.