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Calling all employment businesses - Busting Some Common IR35 Myths & Sales Tactics23rd February 2021 Employment
Paul Chamberlain (Head of Employment) and Sue Ollerenshaw of Efficient Employment Tax Solutions outline some areas of concern for agencies in the run up to the IR35 changes
We can ensure you take home more than 80% of your net pay!
Bizarrely, despite the vast amount of publicity around HMRC’s successful attacks on contractor loan schemes, these are still being pushed. These are being heavily sold to some of the most vulnerable including NHS staff. Have a look at HMRC’s Spotlights:
Comparison and broker websites marketing umbrella companies are not always what they seem (Spotlight 55) - GOV.UK (www.gov.uk)
Make sure that your candidates are not being hoodwinked and potentially causing you problems.
No Intermediary so no problem!
Several providers are selling solutions which seek to avoid the Off Payroll Working Rules. These involve engaging workers directly and highlight that there is no requirement to issue a status determination status (SDS). Engaging a worker directly does avoid the Off Payroll Working Rules (IR35). But this supposed solution potentially accelerates a liability and there is no exemption for “small companies”. If you engage a worker directly, you have both a tax and employment law risk. Unless you can demonstrate to the courts that the reality of the arrangement is B2B and the individual is genuinely self-employed (based on the case law tests), you are liable for any underpaid taxes and employment law rights.
We are the fee-payer so we can decide whether a contract is “outside IR35”!
Other providers are offering solutions to employment businesses, which ‘guarantee’ 80% of contracts will be outside IR35. Many of these are advertising in sectors where there is clear evidence in both case law and HMRC guidance that an outside determination is unlikely in all but limited circumstances. This offering is “we will decide whether inside or outside IR35 and either offer an umbrella solution or for the contractor to engage with another group company to provide accountancy services”. This gives rise to two problems. The first is that it is the end-hirer who is required to determine whether IR35 applies. Yes, the fee-payer or deemed employer or the contractor can appeal this decision using the client led disagreement process. But there needs to be information or evidence to demonstrate that the original SDS was wrong. The second issue is that these “products” are often supported by tax loss insurance. Those businesses that have been in the sector since 2007 will recall that offering tax indemnities is one of the triggers for the Managed Service Company legislation. These rules killed composite service companies overnight. This was due to the transfer of debt provisions not only up the corporate supply change but to directors personally.
So, Does Outsourcing the status determination get the end-hirer off the hook?
No, the end-hirer must be able to show HMRC it has taken reasonable care. If it outsources its obligations, it needs to demonstrate that it has checked the processes and that the provider has the necessary knowledge and skills. Outsourcing to a recruitment business will not in itself be seen as taking reasonable care as most will not have the detailed knowledge of the employment status indicators. Without its own legal and tax department or appropriate external expert support, how can an employment business be expected to have the detailed knowledge of such a complex and grey area?
So, what is the Managed Service Company legislation?
Broadly, most PSC will be a MSC unless there is not a MSC Provider (MSP) in the supply chain. An MSP triggers this legislation if it is involved in promoting or facilitating the use of PSCs. Hallmarks of a MSC Provider include:
- Benefiting financially on an ongoing basis from the services – this could include charging a percentage of the value of the services.
- Influencing or controlling the provision of services – This could include dictating terms or providing terms of engagement.
- Influencing how payments are made.
- Influencing the company’s finances.
- promoting an undertaking to make good any tax loss – HMRC Guidance specifically refers to insurance against financial consequence if HMRC challenge IR35 status.
Both the PSC and MSC Provider may be liable in the first instance. However, if HMRC are unlikely to be able to recover any liability from them, the end-hirer or recruitment business and their directors personally could be liable. These provisions are likely to be used if HMRC cannot recover the liabilities within 3 months, for example, if any party is offshore or has no assets. The onus is on the taxpayer to prove there is not an MSP not for HMRC to prove that there is.
What about the Senior Accounting Officer (SAO) Risk?
For larger businesses affected by the SAO reporting rules, there is an additional risk that the business has not:
- properly managed its risks.
- appropriately managed the implementation of a new system.
- ensured that appropriate training has been given and
- obtained the necessary facts to make judgements.
This can result in personal financial penalties for the SAO and corporate penalties for the business.
So, what is the solution?
There are specific exemptions from the MSC legislation for businesses offering tailored advice/ services as part of their normal business as opposed to targeted specifically at PSC. These businesses are also likely to have the necessary qualifications to satisfy the reasonable care test for the off payroll working rules. So, by taking bespoke advice rather than the heavily sold packaged solutions, all parties in the supply chain can mitigate their risks.
The clear message is to do your due diligence on who you take advice from. Bear in mind that if it sounds to be good to be true, it probably is.