IR35 is a contentious subject. For many recruiters, it has caused headaches over what responsibility and liability they have over the contractors they supply and the tax these hires have.

With many clients opting for the supply chain, i.e. the recruitment agency or umbrella firm to take on the status of ‘fee-payer’ - the party responsible for paying the contract hire’s intermediary - it is often agencies that become responsible.

As a result, there have been instances of public sector hirers enacting a ban on contractors that operate through a PSC. Alternatively, agencies and employers have been making blanket decisions on contractor tax status in order to ensure they don’t get hit with a tax bill. However, this often doesn’t take individual circumstance into account.

Under these changes, many contractors are using umbrella companies to provide them employment-style benefits.

However, this opens up recruitment firms to potential pitfalls. Whilst good umbrella firms can support agencies in calculating the impact of employment cost deductions, including the apprenticeship levy, employer NICs, and the resulting gross pay rate for contractors, there is a risk. As Julia Kermode, CEO at Freelancer Contractor Services Association points out: “It is important that agencies and contractors choose compliant umbrella firms to partner with.”

Below, Kermode has laid out some of the most important things that recruiters and contractors must consider when operating with umbrella firms under IR35.

The Criminal Finances Act (CFA) makes companies liable if they fail to prevent tax evasion by a member of staff or an associate, even if they were unaware of it. Prosecution could lead to criminal conviction and unlimited fines. To protect themselves, recruiters must ensure that their supply chain (in this instance, the umbrella firm) is not facilitating tax evasion and should be particularly concerned given the increase in tax avoidance schemes capitalising on IR35 changes in the public sector.

There are lots of disguised remuneration schemes operating which split contractors’ income into two payments: one set very low so that tax and NICs are not payable; and the remainder as some sort of loan or annuity which the provider asserts is not taxable. Such schemes put the individual contractor at significant personal financial risk as they could be pursued by HMRC for insufficient tax paid on their income. Ignorance is no defence.

In April 2019, HMRC’s loan charge becomes effective, meaning that all outstanding disguised remuneration debts (from loans made after 6 April 1999) will be treated as taxable earnings unless the individual concerned has agreed a settlement with HMRC. For many, this will result in the whole amount becoming chargeable at the higher rate (40%) or the additional rate (45%). Those affected must register their intention to settle with HMRC by 30 September 2018. 

Recruiters must never recommend such schemes to contractors otherwise they could be at risk of criminal offence for failing to prevent tax evasion. Additionally, they should alert contractors to these schemes.

You will become liable for PAYE and NICs if your candidates are working via an offshore structure and that offshore structure does not pay PAYE and NICs properly.  There are lots of umbrella-type structures that might appear not to be offshore so it is essential to check. Additionally, ensure that temporary workers are actually employed by the umbrella company under an overarching contract of employment and not engaged through a third-party company.

There is significant reputational risk if you engage an umbrella firm that subsequently goes into liquidation without having paid your contractors.  Your client may feel that you have an obligation to pay the workers in this instance particularly if you did not check the financial position of the umbrella. 

It is a criminal offence not to pay workers National Minimum Wage and/or to falsify payment records, so you must ensure that your supply chain partners are operating properly. Ensure that 100% of umbrella employees’ gross wages is paid via PAYE. Also, check that the umbrella employer operates its travel and expenses policy in accordance with legislation changes that came in from April 2016.

The Modern Slavery Act requires businesses with a turnover of £36million or more to produce a slavery and human trafficking statement every financial year. Due diligence on your supply chain partners is essential.

There is a financial risk in relation to VAT – if it can be shown that you knew (or should have known) that transactions you entered into related to fraudulent evasion of VAT, you will lose the right to recover the tax paid on these transactions. Request evidence of VAT and PAYE returns that have been filed, and payments made to HMRC.