https://www.ft.com/content/adb1742a-...f-674b3be37cda
When the government last year transformed the way freelance contractors are hired by private sector businesses, there were widespread complaints the move would hurt the UK’s economy and penalise the self-employed.
There were even concerns that key specialists such as IT experts, engineers and accountants, would flee the country en masse, that companies would refuse to hire anyone working through a limited company and the measures would trigger a spike in tax avoidance.
A year on, the worst fears have not been realised. But the reforms have created a confusing marketplace for freelancers with plenty of new traps for the unsuspecting and some bizarre incentives — such as working abroad.
FT Money investigates how the UK’s contractors are coming to terms with their new world.
Freelancer traps
Fiona MacCarthy has worked as a freelance contractor for the past 20 years. Originally from Ireland, the chartered accountant is based in north-east England and has carved out a successful career in short-term project management positions.
Fiona MacCarthy: IR35 rules are ‘a complete and actual frustration’ © Ian Forsyth/FTHaving run the business through her own limited company for two decades, she’s also a veteran of Britain’s complex off-payroll working rules, known as IR35, which govern freelance working.
In place since 2000, these regulations are designed to crack down on so-called “disguised employees”. These are people who, despite working like regular employees, bill for their services via limited companies and avoid paying income tax and national insurance. Instead they pay corporate taxes and dividend tax, which are typically lower.
The rules have always been “a complete and actual frustration,” MacCarthy says, due to the uncertainty surrounding a contractor’s tax status.
“You’re sleeping on the basis that you’re not going to get hit by a hefty financial bill,” she says. “But we have this uncertainty. The taxman can always come along and challenge it.”
She is not alone. An estimated 500,000 freelance workers are covered by the rules that worry MacCarthy. As well as finance specialists, they include IT consultants, engineers, as well as nurses, locum doctors and teachers.
Since April 2021, the decision about whether freelancers working in the private sector should be considered self-employed for tax purposes — known as “outside IR35” — or employed has moved from contractors to their hirers. Similar rules have been in force in the public sector in 2017. The switch puts the final responsibility for paying the right tax on the hirers.
Far from making things less complicated, this has opened up new concerns for contractors.
Umbrella coverage
Crucially, hirers do not normally put IR35 contractors directly on to their payroll but work through payroll agencies called umbrella companies, which take on financial administration and manage tax and pay on behalf of freelance workers.
The system saves hirers time and trouble. But the unregulated industry has attracted controversy. While many firms operate correctly, some have facilitated tax avoidance either on behalf of workers or solely for the umbrella company’s benefit. Others have skimmed funds from workers’ pay packets or withheld holiday pay.
MacCarthy has had two recent contracts classified as inside IR35. In one case, a recruitment agency told her to choose from four umbrella firms, which they said had been vetted. She chose the largest and best-known. However, a few months later the firm suffered a huge hack — leaving her worried about her details being on the dark web.
MacCarthy has also been approached by other umbrellas offering to “maximise” her take-home earnings. She turned down the “clear scam” but worries that others with less experience may be duped by such operators.
“[With umbrella companies], it’s like fishing in the dark, you have no idea what you’re going to get. It could be a salmon or shark or a big octopus that throws you in the water,” she says. “I really don’t like what I’m working to, but I’m forced to do it and forced to do the due diligence.”
The numbers working in this way have grown exponentially in recent years with tax experts attributing the growth directly to IR35 changes.
HM Revenue & Customs estimated that 100,000 people worked through umbrella companies in 2007-08. By 2020-21 it estimated a fivefold increase to at least 500,000. The Low Income Tax Reform Group, a charity, believes the 2021 figure to be even higher — at 600,000.
Meanwhile, a survey of contractors by IPSE (the Association of Independent Professionals and the Self Employed) published last month found seven out of 10 contractors were required by their clients to use an umbrella company since the changes last year.
Almost two-thirds reported that they were asked to choose from a limited range of umbrella firms. Worryingly, 5 per cent said they were not given a choice at all.
“The fundamental problem here is that people are being forced into pseudo-employment relationships they do not want,” says Andy Chamberlain, director of policy at IPSE. “Thousands who proudly consider themselves to self-employed are being pushed into umbrella companies under disadvantageous conditions.”
In the House of Lords, peers have urged the government to do more to tackle bad actors in the industry. “The whole point of the off-payroll reforms was to crack down on tax avoidance,” says Lord Bridges of Headley, chair of the Lords Economic Affairs Committee. “Yet, as we warned the government . . . in 2020, it risks giving rise to a new wave of tax avoidance, as people — many of them on low incomes — end up in rogue umbrella companies.”
Some feel this is going too far. Matt Fryer, head of legal services at Brookson Legal, a law firm focused on IR35, which also runs an umbrella firm, worries “that the whole industry is being tarnished by a few bad apples”. He says some operators entered the umbrella market since the IR35 changes seeing it as an opportunity to make quick money, but there are well-run umbrellas established for many years.
“There are some good things happening in the [umbrella] market but all the noise is around the non-compliant,” he adds.
When the government last year transformed the way freelance contractors are hired by private sector businesses, there were widespread complaints the move would hurt the UK’s economy and penalise the self-employed.
There were even concerns that key specialists such as IT experts, engineers and accountants, would flee the country en masse, that companies would refuse to hire anyone working through a limited company and the measures would trigger a spike in tax avoidance.
A year on, the worst fears have not been realised. But the reforms have created a confusing marketplace for freelancers with plenty of new traps for the unsuspecting and some bizarre incentives — such as working abroad.
FT Money investigates how the UK’s contractors are coming to terms with their new world.
Freelancer traps
Fiona MacCarthy has worked as a freelance contractor for the past 20 years. Originally from Ireland, the chartered accountant is based in north-east England and has carved out a successful career in short-term project management positions.
Fiona MacCarthy: IR35 rules are ‘a complete and actual frustration’ © Ian Forsyth/FTHaving run the business through her own limited company for two decades, she’s also a veteran of Britain’s complex off-payroll working rules, known as IR35, which govern freelance working.In place since 2000, these regulations are designed to crack down on so-called “disguised employees”. These are people who, despite working like regular employees, bill for their services via limited companies and avoid paying income tax and national insurance. Instead they pay corporate taxes and dividend tax, which are typically lower.
The rules have always been “a complete and actual frustration,” MacCarthy says, due to the uncertainty surrounding a contractor’s tax status.
“You’re sleeping on the basis that you’re not going to get hit by a hefty financial bill,” she says. “But we have this uncertainty. The taxman can always come along and challenge it.”
She is not alone. An estimated 500,000 freelance workers are covered by the rules that worry MacCarthy. As well as finance specialists, they include IT consultants, engineers, as well as nurses, locum doctors and teachers.
Since April 2021, the decision about whether freelancers working in the private sector should be considered self-employed for tax purposes — known as “outside IR35” — or employed has moved from contractors to their hirers. Similar rules have been in force in the public sector in 2017. The switch puts the final responsibility for paying the right tax on the hirers.
Far from making things less complicated, this has opened up new concerns for contractors.
Umbrella coverage
Crucially, hirers do not normally put IR35 contractors directly on to their payroll but work through payroll agencies called umbrella companies, which take on financial administration and manage tax and pay on behalf of freelance workers.
The system saves hirers time and trouble. But the unregulated industry has attracted controversy. While many firms operate correctly, some have facilitated tax avoidance either on behalf of workers or solely for the umbrella company’s benefit. Others have skimmed funds from workers’ pay packets or withheld holiday pay.
MacCarthy has had two recent contracts classified as inside IR35. In one case, a recruitment agency told her to choose from four umbrella firms, which they said had been vetted. She chose the largest and best-known. However, a few months later the firm suffered a huge hack — leaving her worried about her details being on the dark web.
MacCarthy has also been approached by other umbrellas offering to “maximise” her take-home earnings. She turned down the “clear scam” but worries that others with less experience may be duped by such operators.
“[With umbrella companies], it’s like fishing in the dark, you have no idea what you’re going to get. It could be a salmon or shark or a big octopus that throws you in the water,” she says. “I really don’t like what I’m working to, but I’m forced to do it and forced to do the due diligence.”
The numbers working in this way have grown exponentially in recent years with tax experts attributing the growth directly to IR35 changes.
HM Revenue & Customs estimated that 100,000 people worked through umbrella companies in 2007-08. By 2020-21 it estimated a fivefold increase to at least 500,000. The Low Income Tax Reform Group, a charity, believes the 2021 figure to be even higher — at 600,000.
Meanwhile, a survey of contractors by IPSE (the Association of Independent Professionals and the Self Employed) published last month found seven out of 10 contractors were required by their clients to use an umbrella company since the changes last year.
Almost two-thirds reported that they were asked to choose from a limited range of umbrella firms. Worryingly, 5 per cent said they were not given a choice at all.
“The fundamental problem here is that people are being forced into pseudo-employment relationships they do not want,” says Andy Chamberlain, director of policy at IPSE. “Thousands who proudly consider themselves to self-employed are being pushed into umbrella companies under disadvantageous conditions.”
In the House of Lords, peers have urged the government to do more to tackle bad actors in the industry. “The whole point of the off-payroll reforms was to crack down on tax avoidance,” says Lord Bridges of Headley, chair of the Lords Economic Affairs Committee. “Yet, as we warned the government . . . in 2020, it risks giving rise to a new wave of tax avoidance, as people — many of them on low incomes — end up in rogue umbrella companies.”
Some feel this is going too far. Matt Fryer, head of legal services at Brookson Legal, a law firm focused on IR35, which also runs an umbrella firm, worries “that the whole industry is being tarnished by a few bad apples”. He says some operators entered the umbrella market since the IR35 changes seeing it as an opportunity to make quick money, but there are well-run umbrellas established for many years.
“There are some good things happening in the [umbrella] market but all the noise is around the non-compliant,” he adds.
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