Money Talk: Are there options for IR35 & umbrella companies? Experts answer your questions

Martin Lewis talks self-employed pension options with expert

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In recent weeks, Katy* wrote to Express Money following employment difficulties arising from oncoming IR35 tax changes. Katy has faced problems with her work arrangements as she faced unexpected Umbrella company set ups. Rebecca Seeley Harris of Legal Consulting and Umbrella Reclaim answer her questions..

Katy explained her situation: “I am a registered nurse and have a full time job with the NHS. I also work with an agency as my second job.

“Due to unsatisfactory management of my wages by an Umbrella Company I have recently set up my own Registered Limited Company, I was unaware of the [IR35] change coming into force in April.

“I have no idea how this now affects me as I am being told I cannot work for the Agency as my company and have to use an Umbrella Company again. Please can you help explain?”

Umbrella Reclaim, a company set up by McFadden LLP as a claims portal for contractors whose salary have suffered unlawful deductions made by their umbrella company or companies, explained how IR35 changes and Umbrella companies go hand in hand.

A spokesperson explained: “The whole point in IR35 was to bring parity, so that permanent & temporary workers pay the same taxes, but now the balance is about to be tipped in the opposite direction.

“Most of the large organisations are making blanket decisions on IR35 and pushing contractors through umbrella companies, who not only charge employer’s national insurance contributions, but workplace pensions, apprenticeship levy & holiday pay, so how is that parity?

“This scandalous behaviour has been going on for years and even though unions have challenged the government over umbrella companies, they continue to make unlawful deductions from workers pay.”

Umbrella Reclaim then went on to address Katy’s specific problem: “I am sorry to hear you suffered unsatisfactory management under your last umbrella, if there is anything we can help with, please do not hesitate to contact us.

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“Firstly, IR35 came into play in the Public sector in 2017, if you had used your NHS bank for additional shifts, you would not have been able to use your own Ltd company. Unfortunately, a nurse does fall under supervision, direction and control and therefore it puts you inside IR35. Unfortunately if you choose to work through an external agency, you will be pushed through an umbrella company for payment, where you may be subject to employers costs.

“In order to comply with regulation 13A of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the ‘Conduct Regulations’), an agency has to provide workers with a Key Information Document (KID). This new regulation took effect from 6 April 2020, and from this date, all agency workers must be given a key information document before agreeing terms with an employment business. However, this regulation does not apply to agency workers with existing terms with an employment business.

“The reason behind the introduction of a KID document, was to give the worker full transparency of their position, detailing an assignment rate, plus the PAYE rate. Unfortunately, in our experience, very few agencies are issuing KID documents (unless at the request of the worker) and in addition, they often only quote the assignment rates to the prospective worker. This is very misleading as the assignment rate is inflated to include employers costs, it is not the actual rate the worker will be paid.

“You would also need to bear in mind, as a second job, you will be taxed on a BR code, so will be paying a higher level of tax. My advice in this instance, would be to use your NHS Trust banking system for extra shifts, rather than an external agency as there are no hidden employer costs or additional taxes.”

Rebecca concluded by noting additional legislation is forthcoming, which should hopefully limit these types of problems going forward: “Again, unfortunately, IR35 is just as complicated. The phrase ‘IR35’ comes from the number of the press release – Inland Revenue ‘35’- which was published by the then Inland Revenue in 1999. This was to announce the coming into force of new legislation – the intermediaries legislation. This legislation was designed to tackle the situation where an individual provided their personal services through a limited company but, if it was a direct contract, it would have been one of employment.

“This means that even though they provide their services through a limited company they will pay tax as an employee, but they will not be an employee in practice, so will have no employment rights or benefits. The law is about to change, however, and on 6 April 2021, there are some new rules called the off-payroll working rules (OP21) coming into force. The new rules mean that instead of the individual assessing their own position for tax under IR35, it will be for the end client to assess whether they should pay tax as a deemed employee or not under OP21.

“Although it is the responsibility of the end client to make the assessment, if the client decides that the individual should be paying tax as a deemed employee, it will be for the so-called ‘fee-payer’ to make sure the tax is deducted from the individual and paid to HMRC. The fee-payer is usually the recruitment agency.

“Unfortunately, it seems that in order to minimise their risk in dealing with individuals who contract through limited companies, sometimes known as personal service companies, the recruitment companies are refusing to deal with these limited companies and are instead forcing them to contract through an umbrella company. There is little that can be done about this situation other than to make sure that you choose an umbrella company wisely. There are obviously some good ones out there but there are too many rogue one’s so be careful.”

Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

*Name has been changed.

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