The Lords Select Committee met on 10th February to hear evidence from representatives from the accountancy and tax professions to inform their inquiry into the off-payroll reforms due in April 2020*.
Whilst understandably the focus was on the impact on end hirers and the additional compliance burden they must bear, important points were raised about umbrella companies and tax avoidance schemes that masquerade as umbrella companies.
Concerns about tax avoidance schemes raised
Concerns were raised that there are still tax avoidance schemes that are masquerading as compliant umbrella companies whilst offering up to 90% take home pay. The fact that HMRC are not taking action to close these schemes down means that contractors that are no longer able to operate through personal service companies may unwittingly enter a non-compliant scheme. In the future the contractor may find themselves with a significant tax bill, plus penalties further down the line.
The above also presents a risk to recruitment agencies. The introduction of the debt transfer provisions with the off-payroll rules effectively passes the responsibility to police the supply chain. If a tax avoidance scheme enters the supply chain and HMRC have no reasonable chance of recovering the tax liability from the fee payer, they will attempt to recover this from the first agency in the supply chain. If they are not able to recover the liability here, they will shift this liability to the end hirer.
In addition to the debt transfer provisions included with the reforms, recruitment agencies must also consider implications of The Criminal Finance Act. The 2017 legislation introduced new offences that mean a recruitment agency (and the directors personally) could be criminally responsible for facilitating tax evasion if they refer contractors to a tax avoidance scheme or fail to prevent them using a tax avoidance scheme.
This means it is more important than ever to complete due diligence on all the umbrella companies in your supply chain. We would also suggest auditing this regularly.
One of the recommendations accepted by the government as part of The Good Work Plan is the regulation of umbrella companies in the supply chain and BEIS is currently consulting on the formation of a single regulatory body to incorporate this. This move to regulate umbrella companies and crack down on unscrupulous providers is welcomed by Parasol. As part of our role on the board of the FCSA we actively drive compliance in the industry.
What do we at Parasol think?
We look forward to the day when all umbrella companies are regulated, and the unscrupulous providers are shut down. However, until then we remain committed to transparency and compliance and are happy to answer any questions that our agency partners have.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.