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
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
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
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
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
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
happening with non-compliant Umbrella
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
practise for processing payroll for temporary
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.
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.