When the IR35 rules changed in April 2021, this signalled a significant shift for medium and large businesses.
This is one that many are still getting to grips with a year down the line. It is easy to imagine that hiring contractors off-payroll would be easy. Yet, the new rules brought a modification to the existing system muddying the waters for both contractors and businesses alike.
With a softly-softly approach in progress for the last 12 months businesses may think they have been compliant so far. Well, think again as things may be about to change. Just because a business has not had any issues yet does not mean it is doing everything right. Equally, it does not mean that an HMRC enquiry has been avoided.
There is ongoing impact for businesses that is set to continue.
How Companies Are Attempting To Solve IR35
Many may think their IR35 approach is water-tight and will stand up to scrutiny by HMRC. However, there has been much misinformation. Even taking a slightly dubious approach or being on the receiving end of bad advice could lead to issues. There are some grey areas within IR35.
This is a highly complex area, and many businesses are taking different approaches. This is true even within the same sector. However, the way IR35 status is dealt with can be the difference between a piece of work being affordable or unaffordable, so it is unsurprising that different businesses reach different conclusions.
This can be challenging for specialist contractors swapping between businesses. It can also lead to unforeseen problems where contractors have not been treated correctly. Put simply, the interpretation of IR35 status can be wrong and lead to an enquiry.
HMRC IR35 Enquiries
Since April 2017 with changes for the public sector IR35 rules, there have been many cases of HMRC enforcement reviews. These have been spread across the media and in many of the biggest cases HMRC have been successful.
Their pursuit of income tax and NI liabilities leading to penalties for non-compliance are significant. Although there have been few cases since April 2021 from medium and large businesses, the honeymoon period is over. Enforcement reviews are already happening with certain industries. These are set to ramp up and cut across a wider range of sectors now. This ongoing impact of IR35 is a significant issue for a range of businesses to consider.
There is no easy solution to this issue. Some organisations act cautiously, others are more liberal and presumably hope for the best. However, the risks of non-compliance can be crippling for a business – even one in a good financial position.
Those working within the IR35 rules should prepare for future scrutiny at some time. They should also consider that a successful enquiry into one case could lead to a domino effect with others. Businesses should take the time to re-examine their current practices with a legal expert in IR35.
Now is the time to take action to avoid future issues. Being ready and complying with legislation to the closest letter of the law is wise. Perhaps IR35 simply needs to be seen as a potential commercial risk where businesses use it.
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HMRC’s soft landing period has ended and IR35 enquiries will soon begin in the private sector. Make sure you identify any risk areas and ensure you’re managing it correctly.
A Quick Guide to Umbrella Company Cloning
There is an issue happening right now under the noses of some of the biggest umbrella companies.
It is one that the Freelancer and Contractor Services Association (FCSA) has picked up on. It involves umbrella companies. Simply put, an umbrella company is one that employs contractors, freelancers or other temporary workers. This is typically on behalf of an agency. It then provides the services of those workers on to businesses.
The umbrella company generally has an employment contract with the contractor. It also has to be compliant with the employment law of the UK. The umbrella company employs the contractor and pays them. They likely deduct additional fees as well as pension contributions, NI and holiday pay. So, they can be a one-stop shop for contractors looking for work with larger businesses. Herein lies the issue.
Umbrella Companies May Not Always Be What They Seem
There are legitimate and trustworthy umbrella companies available in the UK. Equally there are some unscrupulous and untrustworthy ones set to defraud contractors and businesses. An easy way to do this is to clone an existing firm who already has a good reputation. They have the trust of their contractors and the businesses they work with. They are a safe bet.
The fraudulent umbrella company comes along, clones their name almost to the letter and registers with Companies House. When a contractor comes along to see whether they are a legitimate organisation, they may seem to be so. Companies House gives these businesses an immediate legitimacy. This should not happen, and this is what the FCSA want to put an end to.
There have been 13 umbrella companies in this latest group that have been cloned. One is Clarity Umbrella, a well-established organisation.
How Umbrella Companies Are Cloned
These copycat companies are allowed to register almost identical names. There is often just a single letter different. It is leading to existing and potential new contractors being duped by the fraudulent firm.
Unsurprisingly this means the company can steal the revenue from the proper umbrella company by liaising with its partners. Often the directors of the company are based outside the UK in countries such as India. This means that legal recourse is often impossible. The FCSA is appealing to the government directly to solve this issue. There are various ways to do it.
Firstly, having a cloned company removed from Companies House is not a quick process. It typically takes many months by which time the cloned umbrella company can have done a lot of damage. This needs to happen more quickly. The losses of individual contractors can be significant, yet they are often wooed by the offer of high pay. Anyone knowledgeable in the business would know these rates are not achievable in a legal way.
Having some kind of check in place to ensure a new company is real could avoid this issue. Even just a few red flags to look out for multiple similarly named companies registering in a short time period. However, this is time consuming. Although the government promises to act, the achievability and timescale of this remains to be seen for now.
