The problem was, and is, that the revisions caused umbrella companies to fall within the definition of intermediaries, which wasn’t quite expected. Whilst it may be appropriate for some umbrella companies to be so treated , those that pay their workers without deduction of tax, the great majority operate either PAYE or CIS tax. The consequence would be that end-clients paying umbrella companies may feel obliged to make deductions from payments made to umbrellas in line with the revised legislation, leaving the umbrella companies with insufficient cash and tax credits to pay their workforces.
HMRC’s statement explains that this is not the intention of the legislation and its guidance makes this clear. The prompt action on this front is to be welcomed, but it still begs the question of how such defective legislation was allowed to pass through Parliament and highlights the complexity of rules surrounding employments status, off-payroll working and IR35?
We appear to be building legislation that works much like the mousetrap in the popular board game, rather than the simple spring-loaded device available in most hardware shops. It has also been a feature of IR35 that HMRC, taxpayers, Tribunals and Courts have found it difficult to identify the perpetrators of the misdeeds that the legislation is trying to nail, much like the other long-running Mousetrap!
Rather than building complexity on complexity, perhaps it would be better to go back to basics and try to work out the real issue. It’s accepted that each £1 of earnings of a self-employed person generates less tax and national insurance than each £1 of an employee’s earnings. A similar position applies to those who own their own companies and pay themselves largely via dividends. The main culprit in this area is Employers NI, which is only charged in respect of employment income and is not charged on the income of the self-employed or on dividends. If differential rates of NI paid by workers and the difference between income tax and corporation tax rates are added in, then there should be no surprise that employment is a less financially attractive form of engagement for both workers and those who use their services.
Whilst there may be some justification for those who take risks and engage in entrepreneurial activity being incentivised by the state through the tax system, the extent of the reward may outweigh the level of risks taken and such over-reward may have led to faux-entrepreneurship.
What’s to be done? Well, there are a few ideas that have been around for a while, including:
- the nuclear option of recognising that NI is a tax and combining it with income tax and charging it on all forms of income
- a kind of levelling-up tax on businesses that engage the self-employed and small limited companies, which the Demos think-tank proposed. An Engagers’ Tax, which would work similarly to Employers’ NI and would be paid by those businesses that engage workers other than on payroll
- a more wide-ranging version of the Construction Industry Scheme, requiring engagers to deduct a flat-rate amount of tax from payments made to the self-employed and small limited companies, which would be offset against the tax liabilities of the individuals and companies for the relevant period
- allowing freelancers/contractors to operate via some form of special status company, maybe like a US LLC, which would be either tax-transparent or if not, would have to pay an additional rate of tax on distributions above a certain level and on excessive retained profits.
I’m sure these ideas and many more will be presented to the Treasury Committee on Tax After Coronavirus, which is currently taking evidence.
If you have concerns about how off-payroll working rules will affect you, are uncertain whether or not IR35 applies to you, or want to understand more about your employment status for tax purposes, please get in touch with your usual UHY adviser.