Finance Bill Sub-Committee blames IR35 for ‘concerning’ rise in umbrella company contractors

The authorities should do extra to guard umbrella employees in the wake of a “concerning” uptick in the variety of contractors working by way of payroll processing corporations for the reason that onset of the IR35 reforms in the non-public sector.

That is in accordance with the House of Lords Economic Affairs Finance Bill Sub-Committee, which – in the wake of its newest inquiry into the IR35 reforms – is urging the federal government to choose up the tempo of its dedication to rolling out statutory regulation for umbrella corporations.

The sub-committee’s inquiry got down to assess the impacts of extending the IR35 reforms to the non-public sector in April 2021, and one in all its main findings was that the choice led to a surge in the variety of contractors working by way of umbrella corporations.

Many medium-to-large non-public sector organisations took steps to tweak their hiring polices forward of the reforms coming into play, in order to minimise the extra administrative burden that complying with the adjustments would doubtlessly generate.

That is as a result of the reforms shift accountability for figuring out how restricted company contractors ought to be taxed away from the person and onto the end-hirer, based mostly on the work the contractors do and the way it’s carried out.

Previously, it was right down to contractors to resolve for themselves whether or not they need to be taxed in the identical means as salaried staff (inside IR35) or off-payroll employees (exterior IR35).

Some non-public sector organisations have sought to absolve themselves from having to resolve how the contractors they have interaction with ought to be taxed by introducing hiring bans that prohibit the usage of restricted company contractors in favour of these employed by way of umbrella companies.

The sub-committee’s inquiry confirmed that such hiring insurance policies have resulted in extra contractors being employed by way of umbrella setups for the reason that roll-out of the IR35 reforms in the non-public sector, which it mentioned was regarding due to the prevalence of “rogue umbrella companies” in the market.

“The sub-committee is very concerned to note that the extension of the off-payroll rules to the private sector is resulting in greater numbers of people using umbrella companies, and increasing the risk that some individuals, particularly those on low incomes, will become involved with rogue umbrella companies associated with tax avoidance,” the sub-committee wrote in a 14-page letter, addressed to Lucy Frazer, monetary secretary to the Treasury.

This concern pertains to previous cases of contractors being lured into working for umbrella corporations which are successfully fronts for tax-avoidance schemes, which provide “too good to be true” take-home pay charges by paying a part of the contractor’s wage in tax-free loans.

And as a result of the IR35 reforms are designed to stop tax avoidance occurring on account of contractors intentionally misclassifying themselves as being “outside IR35” to minimise their employment tax liabilities, the sub-committee mentioned the surge in umbrella company utilization risked “substituting one form of tax avoidance for another”.

It added: “The sub-committee is very concerned that the off-payroll rules are encouraging the insertion of unnecessary intermediaries in the supply chain, adding to costs and opportunities for ‘rogue’ operators. We believe that effective action requires a stronger focus on worker protection.”

The authorities is in the midst of a session, launched in November 2021, into how the umbrella company sector works, to tell the federal government’s considering on what form statutory regulation of those organisations ought to take.

The sub-committee referenced this session in its letter to Frazer, however mentioned it might have preferred to have seen a “greater focus on the protection of workers” employed by umbrella corporations and a “clearer indication of the government’s intentions” when the session’s name for proof was launched.

“The sub-committee feels that the government has been slow to act against the harm caused by the activity of non-compliant umbrella companies,” mentioned the letter.

“We recommend an early indication of what use the government intends to make of the information it collects, what action is proposed and to what timescale.”

The letter added: “In the absence of efficient statutory motion, umbrella corporations are proliferating. More and extra people are susceptible to getting caught up in tax-avoidance schemes.

“The government needs to commit to a date for bringing forward legislation to create the proposed single enforcement body to regulate umbrella companies.”

The sub-committee’s findings and conclusions are based mostly on the written proof it acquired from greater than 30 contracting market stakeholders, starting from commerce associations to particular person contractors, throughout November 2021 and a number of other oral proof periods in December 2021.

Sub-committee chair Lord Bridges of Headley mentioned the federal government should act swiftly to push by way of regulation for umbrella corporations to stop new mechanisms of tax avoidance rising.

“The whole point of the off-payroll reforms was to crack down on tax avoidance,” he mentioned. “Yet it risks giving rise to a new wave of tax avoidance as people – many of them on low incomes – end up in rogue umbrella companies. The government must take action to protect workers from ‘rogue’ operators as a matter of urgency.”

Crawford Temple, CEO of umbrella company compliance accessor Professional Passport, backed the sub-committee’s findings and mentioned the IR35 reforms have created a “perfect storm” that permits “tax avoidance and disguised remuneration schemes to thrive”.

He added: “Along with others, Professional Passport highlighted these threats, which the government simply ignored and now we are seeing the fall-out as highlighted in the Lords report.”

Temple mentioned that though regulation is being heralded in many quarters because the route to raised defending contractors from unscrupulous, non-compliant umbrella corporations, far more must be accomplished to clamp down on the individuals who create and run these rogue companies.

“Over the last two years, with the country focused on Covid, there has been a lack of any visible and proactive enforcement, and any enforcement we have seen has been targeted at the workers and not the promoters of the schemes who have been allowed to flourish and keep any money they make,” he mentioned.

“It is time to stop the perpetual cycle of legislation and radically rethink and simplify the rules that work for the benefit of all those in the sector who are striving hard to raise standards and drive out those who consistently seek to break the rules and behave unethically.  Let’s put an end to a sticking-plaster approach to an existing framework that is fundamentally flawed.”

Computer Weekly contacted HMRC for its response to the sub-committee’s findings, and acquired the next assertion from a spokesperson: “The government welcomes the committee’s follow-up inquiry into the impacts of the off-payroll working reform introduced in April 2021. The government will carefully review the conclusions and recommendations of the inquiry and will respond to the committee in due course.”