Overview
Sarah Gabbai, Tax attorney at law firm McDermott Will & Emery, said:
“Given the complexity and uncertainty created by the new “off payroll” rules, it’s not at all surprising that large business clients are finding it difficult to comply. Ultimately, getting it right depends on the correct classification of workers and contractors as either employees or self-employed. Far from being a bright line test, the boundary between employed and self-employed status is far from clear, and although HMRC’s Check Your Employment Status (CEST) tool is supposed to help clients figure this out, it has actually created more problems than it has solved due to its lack of consistency with the case law. The risk of getting it wrong is significant, which is why we are seeing many large businesses either take a blanket approach to classifying all contractors as deemed employees, or forego contractor hires altogether. This can lead to labour market distortions- contractors end up either losing work, changing jobs or moving overseas.
Umbrella companies can be, and often are, a convenient way for contractors and end clients to avoid having to deal with IR35 risk. While many are legitimate and fully compliant with their PAYE and NICs obligations, some have been used as a means of enabling aggressive tax avoidance or evasion, and large businesses looking to hire contractors through this route in order to manage IR35 risk should undertake thorough due diligence checks on such companies to be sure they are operating PAYE correctly and paying NICs on all the workers’ earnings. In this vein, I would recommend that they ask questions about how the contractor is being paid and take advice about how the contractor is likely to be taxed. These checks should form part of any risk assessment and prevention procedures required under Part 3 of the Criminal Finances Act, which all UK companies and partnerships must comply with in order to avoid being found guilty of a corporate criminal offence under that Act. Even if there is no tax evasion, businesses will need to be aware that some umbrella companies have in the past been co-promoters of aggressive tax avoidance schemes known as “disguised remuneration” schemes and should factor this into their prevention procedures accordingly. It could also feature as part of a business’s tax strategy if the business is required to publish one. Such measures ought to protect the business from reputational or financial harm should there be an audit or investigation from HMRC, particularly if there would otherwise be the potential for them to be seen as an enabling participant in an abusive tax arrangement.”
