On 9 March 1999 the Government issued a press release (IR35) outlining its plans to ‘counter avoidance in the area of personal service provision’. These measures were a response to HMRC’s concerns around individual consultants assuming the role of a ‘traditional employee’ while taking advantage of corporate tax structures and paying reduced income tax and National Insurance. The Intermediaries Legislation became law in 2000 and remains in place today. Here, in the first of two articles, we look at how IR35 has added fuel to the non-compliance fire, and what can be done about it.
As a follow-on from the Intermediaries Legislation, Off-payroll Legislation was introduced in 2017 into the Public Sector, and in 2021 into the Private Sector. This new version of the rules saw end-clients becoming responsible for assessing the status of their contractors.
Both sets of legislation were designed to tackle tax avoidance which the Treasury believes is depriving the coffers of millions of pounds annually. However, there is a certain amount of grim irony in the whole situation when we consider that the introduction of this tax-avoidance legislation has actually given rise to a proliferation of tax-avoidance schemes, cheating the Government out of the millions of pounds that it sought to claim, and which it will never recover.
The introduction of the Off-payroll Legislation saw a blanket ban from many organisations on the use of limited company contractors in order to avoid becoming entangled in complicated tax arrangements and potential action from HMRC. This then led to many contractors using umbrella companies in order to try and stay compliant while maximising their income lawfully.
Recent statistics estimate that there are around 4.39 million self-employed workers in the UK, many of whom rely on the ‘gig’ economy to earn their living. This rapidly-changing landscape of work now presents a problem to the Government as it seeks to play catch-up with how people have responded to new ways of working and living.
Sticking plaster legislation
Over the years the Government has tried many times to address the issues surrounding the flexible labour market. In 2010 the Office for Tax Simplification was launched; in 2011 HMRC’s new Business Entity Tests were introduced; and in 2015 the IR35 Forum provided recommendations on how it could improve.
However, despite all these initiatives, layer upon layer of sticking plaster legislation has failed to address the serious issues and challenges that the flexible labour market faces; in a commercially-competitive environment, non-compliance and enforcement have not been addressed in a rigorous enough fashion, leading inevitably to an environment where non-compliance has won out.
The Off-payroll legislation has seen many contractors operating through new vehicles to them – umbrella companies. We have examples of many contractors who clearly do not understand the arrangements and have been hoodwinked into signing up for schemes that are non-compliant and which in fact are disguised remuneration schemes purporting to be umbrella companies.
HMRC is simply not acting swiftly enough to shut down these schemes which are thriving. The enforcement strategies that are currently in place are not working and merely serve to incentivise non-compliant offerings, despite HMRC holding all the data necessary to find out who’s behind these schemes and take action against them.
Thankfully it’s the industry itself which has recognised how critical a compliant supply chain is when trying to ensure that the highest possible standards are being met. However, as recruiters grapple with their short-term business needs, pressure on them mounts to join in with business opportunities that are simply illegal.
Next time we’ll look at how recruiters can avoid non-compliant schemes and the help that Professional Passport can offer them.