IR35: The shift of criminal liability in the Private Sector and its impact on businesses

Do you use a third party to supply your business with temporary workers? If the answer is yes, you’ll need to consider how the upcoming changes to tax regulations in April 2021 could impact your business…

Do you use a third party to supply your business with temporary workers? If the answer is yes, you'll need to consider how the upcoming changes to tax regulations in April 2021 could impact your business…

What's happening in 2021?

On 6th April 2021 HMRC plans to introduce changes to the rules surrounding tax avoidance, commonly referred to as the IR35 reforms. The changes will extend those introduced in the Public Sector back in 2017 to include Private Sector businesses, supporting changes implemented through the Criminal Finances Act 2017.

What are the risks to my business?

Under the Criminal Finances Act 2017 a company is deemed criminally liable if a business does not have the processes in place to prevent tax evasion. Coupled with IR35 reform these changes put more pressure on companies as the burden of compliance moves away from their staffing suppliers and rests on the business and its contracted workers.

Why are these changes happening?

IR35 reform aims to close a loophole which is allowing intermediaries, primarily through the use of umbrella companies, to deduct National Insurance Contributions (NICs) under certain circumstances.

Before 2017 there was a significant amount ambiguity in the law surrounding agency practises and the use of non-compliant umbrella companies, subsequently it has been difficult for HMRC to recover tax from such companies. The shift in onus to the client and the employee through recent legislation creates greater clarity in the law and makes it far easier for HMRC to recover costs. Under the new legislation they would now seek to recover tax from an 'end client', i.e. an agency's client or paid worker, rather than the umbrella itself, putting those working with agencies, who are using non-compliant umbrella companies, at a much higher risk.

What is the issue with Umbrella Companies?

Many umbrella companies are compliant and operate within the standards outlined in the law but there are lots that aren't compliant, which is where the new reforms hope to make a difference.

Often an agency will create an umbrella company for the purpose of employing their temporary workers through it. The non-compliant umbrella company is often based off-shore for the purpose of tax relief and typically offers workers non-taxable payments in the form loans.

What's been happening with non-compliant Umbrella Companies?

Some agencies use umbrella schemes to gain a competitive advantage as they are able to reduce charge rates and increase wages. This is usually achieved through NIC deductions, reducing the cost of processing workers and enabling them to increase the percentage of pay a worker takes home from around 65% to 85-90%. However, the changes in legislation mean that these types of practises are no longer compliant and these companies are, consequently, placing the burden of liability upon their workers and clients.

What's best practise for processing payroll for temporary workers?

The most compliant way to process payroll is through pay as you earn (PAYE). With PAYE the agency will generally have an in-house payroll process, whereby all temporary workers are employed directly through the agency, thus removing the unnecessary risk associated with umbrella schemes. PAYE is currently the most compliant way to process temporary worker's pay and ensures both workers and clients can rest assured they have no involvement in any tax avoidance processes.

What Now?

Although these changes are in their infancy, one thing is for sure, the reforms demonstrate a higher risk to individuals and businesses. With the introduction of IR35 reform on 6th April 2021 it is a good time for companies to start reviewing their existing contracts and relationships with intermediaries and seek assurances that those they're working with have taken the necessary precautions to ensure full compliance.

We pride ourselves on our fully compliant processes and have always chosen to carry out payroll using PAYE with our own in-house payroll team. We believe in building trust and strong relationships with businesses and our practises reflect this. As the changes start to take effect in the industry, we hope to see more agencies start taking the ramifications of these reforms more seriously for the sake of their clients and workers.

Get in touch if you would like to chat to us more about this or find out more about how we work here.

 

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