Financial Times - Freelance tax reforms leave traps for the unwary

[cojak]

Who said anyone was against paying for journalism? Why share a link if you're so vehemently against news being made available without a paywall? And, having read the article, "higher quality journalism" doesn't apply to this piece.

Exactly.

I already pay for my high-quality journalism, I’m just not paying again for the ft.

[ladymuck]

This article was also shared here
https://forums.contractoruk.com/acco...ml#post2932554

[ladymuck]

Use https://12ftio if you're against paying for higher quality journalism.

If you paste the FT link into google, you can still navigate to the website and view the comments. No such thing as a free lunch. If I want junk journalism I'll head to the i or Daily Mail.

Who said anyone was against paying for journalism? Why share a link if you're so vehemently against news being made available without a paywall? And, having read the article, "higher quality journalism" doesn't apply to this piece.

[agentzero]

Use https://12ftio if you're against paying for higher quality journalism.

If you paste the FT link into google, you can still navigate to the website and view the comments. No such thing as a free lunch. If I want junk journalism I'll head to the i or Daily Mail.

[cojak]

Yes, I’m sure they are, but they’re behind a paywall so I’m not going to read them.

[agentzero]

Yep, we know… https://forums.contractoruk.com/acco...ntractors.html

That thread relates to MSC.
The article relates to IR35, MSC and Umbrella companies. The comments are interesting.

[cojak]

Yep, we know… https://forums.contractoruk.com/acco...ntractors.html

[agentzero]

In search of managed service companies

Crawford Temple, chief executive of Professional Passport, a firm that assesses umbrella company compliance, says these companies have an “important place” in the market, helping businesses in hiring staff and workers in managing financial administration.

But Temple added that not enough had been done by the authorities to protect workers, in the aftermath of the IR35 changes, from rogue actors.
The government says it has introduced new requirements to improve the financial information provided to agency workers. A spokesman says: “Protecting and enhancing workers’ rights through robust regulation — including for those employed by umbrella companies — is a priority for this government.”

Tax experts advise umbrella workers to be on their guard and thoroughly research firms. They should also check payslips carefully and cross-reference the net pay in their bank accounts with what the umbrella reports to HMRC. They can do this by using their personal tax account on the gov.uk website.
Dubious umbrella companies are not the only trap that freelancers face. Previously little-used legislation known as managed service company (MSC) law is also “starting to rear its head”, as HMRC ramps up enforcement, warns Seb Maley, chief executive of Qdos, an advisory firm.
The legislation, dating from 2007, seeks to stop company directors choosing to pay corporate taxes and dividend taxes instead of employment taxes if the company is controlled by another party, such as an accountant, tax adviser or even recruitment agency.

If HMRC categorises a firm as an MSC provider it deems all its clients as users of an MSC and levies PAYE and national insurance on any income earned by the contractors’ businesses.
So far this year, HMRC is known to have written to at least two contractor accountancy firms classifying them as MSCs — a position the businesses dispute.

“Contractors need to be mindful of not using accountancy firms that take too much control over how their companies are operated and run,” says Dave Chaplin, of tax advisory firm IR35 Shield. “The provider should be a simple book keeping operation.”
Another development has seen some contractors band together to work via small consultancies. The IR35 rule changes only apply where the worker is personally providing services to a medium or large firm. By working via small consultancies, some contractors argue they are exempt from the new rules because the consultancy is small and they charge for services rendered rather than labour supplied.
Maley warns: “There are risks associated with this. HMRC will quickly see through any artificial arrangement when it is essentially a way of supplying contractors.”

Tax experts told FT Money that HMRC has already begun looking into the IR35 affairs of companies using contractors, since the soft-touch period previously announced by Rishi Sunak, the chancellor, ended last month.
Yet another issue causing difficulty for contractors and their hirers is how tax is collected in cases of non-compliance.
The aim of the IR35 reform was to shift the responsibility over who classifies the contractor’s tax status — from the individual to the hirer. Hirers and intermediaries, such as recruitment agencies, are therefore now liable for unpaid tax if HMRC finds a worker has been wrongly classified, plus interest and penalties.

But HMRC has admitted to MPs that there is currently no law that allows it to offset any tax already paid by the contractor against tax paid by their hirer. “Because of this mismatch HMRC may receive tax twice on the same amounts,” explains Susan Ball, partner at accountancy firm RSM.
HMRC has also confirmed that contractors can reclaim any tax they have paid on income earned if their hirer is later found to have made a mistake — causing alarm to businesses, their tax advisers and MPs. “Tens of thousands of contractors could end up paying no tax at all,” Ball warns. “There is an urgent need for these rules to be corrected so that . . . engagers are not unfairly penalised.”

To protect themselves, some businesses ask contractors to sign agreements that would return any tax reclaimed by the contractor, if they are miscategorised, to the hirer.
But contractors should be careful about exactly what they agree to, warns Chaplin. “It would be dangerous for contractors to fully indemnify a client, just based on HMRC forming an opinion the contract should be inside IR35,” he says.
Overall contractors may be wary of making tax reclaims, if their hirers miscategorised them, adds Fryer. Doing so may highlight to HMRC that the individual could have miscategorised themselves as self-employed for tax, in contracts which started before April 6 2021, when they should have been employed for tax purposes.

The new IR35 landscape

Despite the difficulties, advisers and contractors say the freelancer market is doing better than many expected this time last year. Tax experts say this is due to several reasons, including the surging labour market and businesses taking a pragmatic approach to the rule changes.
Fryer describes it as a “jobseekers’ market”. Rather than contractors struggling to find work — as predicted in the lead up to the changes — hirers are struggling to fill openings. Contractors, especially highly skilled ones, are becoming quite “picky” he reports and only looking for roles advertised as outside IR35 and therefore fully self-employed. A survey conducted by Brookson Legal late last year found 87 per cent of businesses using contractors or freelancers had been forced to increase their pay rates since the introduction of the changes.

Maley agrees that a competitive landscape has emerged. Though some business continue to refuse to hire individuals who use a limited company, these are falling in number. Businesses which focus on getting to grips with the rule changes “really have the pick of the talent”, he says.

“What we initially saw was panic, but now companies are revisiting what they did [when the rules first came in],” he adds. “A lot of contractors were quite pessimistic and thought it was the end of contracting, but that’s not the case.”
MacCarthy says “businesses have got their head around” the changes. “The market has been very buoyant over the past six months as clients are seeking to recover from the pandemic and get on with projects,” she says.
But there are still niggling issues. For example, when she takes on roles inside IR35 — so not self-employed — she cannot claim travel expenses out of gross income. This makes travelling to jobs difficult as her day rate becomes prohibitively expensive. So she seeks work within the north east of the country, but argues that forcing contractors to work locally has “a damaging impact” for clients and the economy.
The rule changes have not resulted in the exodus of contractors that was feared. But Chaplin says it has led to “bizarre” incentives to work for companies outside the UK — because the changes do not apply to overseas hirers.

Contractors therefore continue to self-assess their tax status when they work for a business wholly outside the UK — leading many to seek foreign clients. Chaplin says he has heard of UK-based hirers turning to contractors from abroad — as the new rules do not apply to them either.
“We have entered this bizarre situation when it makes sense not to work in your own country, and that’s a consequence of badly designed legislation,” he argues.

Problems taxing work

Overall, the changes have gone more smoothly than expected, according to Colin Ben-Nathan, chair of the Chartered Institute of Taxation’s employment taxes subcommittee.
But he believes this area of tax law needs a more strategic focus from the government. “A continuous quantity of sticky tape has been applied to keep the show on the road.”

The government should come up with a legal definition of employment, both for tax and employment law, he urges. “If we can’t define what we mean, we’ve got an almost insoluble problem.”

Ben-Nathan called on the government to implement the Taylor Review, a 2018 report into work practices, which proposed a holistic approach to tax and employment.

Several tax experts agree this is necessary. The government has recently announced a new review into the future of work which it says will “build on existing government commitments” including the Taylor Review. But, the terms of reference mention tax just once — to say the rates were out of the review’s scope.

In the absence of deep-rooted change, tax experts predict that further tweaks to IR35 regulations could include a removal of the exemption for small companies and greater oversight of umbrella firms.
But Anita Monteith, head of taxation policy at the Institute of Chartered Accountants in England and Wales, argues the government should “bite the bullet” and address the underlying problems with taxing work.
“When you go into business, you don’t go into business to become a tax specialist on the side,” she says. “And at the point you want to hire somebody you don’t want to be terrified of getting something wrong. Tax should be the easy bit.”

[agentzero]

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.