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..
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.”
Further advice was also provided by Rebeca Seeley Harris, An Independent Employment Status, Off-payroll and IR35 Expert and former Senior Policy Adviser with HM Treasury’s Office of Tax Simplification (OTS).
Rebecca acknowledged this is a very difficult situation but highlighted that good news could be on the horizon: “Unfortunately, this is an area that is fraught with complexity both in terms of the ‘IR35’ legislation and the umbrella companies. Umbrella companies are not regulated and have been heavily restricted in their activities by continual tightening of the rules by HMRC in the last 20 years. The umbrella company nowadays is little more than a payroll company, with very few allowable deductions from the wages by way of expenses. So any umbrella company that offers a package that looks too good to be true, probably isn’t safe to use.
An umbrella company will employ you for onward supply to the end client. You are in reality an employee of the umbrella company and the benefit of this to the end client and the agency, is that they are protected from tax claims and employment rights issues. The downside is that as an employee of the umbrella you will have employee national insurance contributions deducted alongside income tax.
“What you probably don’t know is that the umbrella will also deduct the employers’ NICs from your wages as well and that is an additional 13.8 percent. You should, however, be paid holiday pay and sometimes this is ‘rolled up’ and paid along with your wages. Whether this is technically legal or not is still up for debate but, it does mean that you have to put the money aside yourself to pay for time off. Your agency should also supply you with a Knowledge Information Document (KID) that details exactly how your pay is broken down. This is now a legal requirement, so make sure you ask for it if it is not forthcoming.”
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.”
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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