HMRC clamping down on umbrella companies

All but SME 2
HMRC cutting down on permtractors

It can be a pretty good setup if you’re working for a regular client, on their premises, on an ongoing basis. They don’t have to give you employee rights (like pension contributions and holidays): you can charge a good ol’ day rate and not feel tied in.

Your ‘umbrella company’ invoices them for you, they send your pay in the other direction, your umbrella company takes care of taxes and benefits, and you don’t have to mess around with Self Assessment. Wallop!

So what’s the problem?

Sometimes employer/contractor arrangements such as these tip-toe into the realms of what HMRC refer to as ‘disguised employee’ relationships. The contractors involved can be called ‘permtractors’ or ‘the Monday to Friday crew’ as they’re essentially unemployed at the end of each week… and back like nothing happened on Monday morn.

‘Disguised employee’ relationships cost HMRC money in taxes, and they’re fighting back.

A history of retribution

Back in 1999/2000, contractors caught ignoring intermediary working relationship rules (basically operating like employees but, err, ‘circumnavigating’ PAYE requirements) were taxed as employees. That sometimes meant as much as a 25% reduction in earnings.

Then tax legislation IR35 came into play. It monitored working relationships within the public sector, and made employers responsible for ensuring contractor arrangements were legit. Then it charged them for any shortfall in HMRC taxes (like National Insurance Contributions) they’d benefitted from by being naughty.

The government look like they’re rather pleased with last year’s results, as they’ve been aiming to mimic the situation across the private sector from April ’19. This would help them further reclaim missing moneys, and (theoretically) protect employees from unfair contractual/working rights.

Aiming to? Or going to?

There are a few doubts knocking around as to both the likely timing and potential effectiveness of the updated IR35 plans.

The government has been ‘aiming’ for an April ’19 introduction for some time – but that time seems to be running out rather quickly.

And the public sector ‘trial’ wasn’t reviewed with widespread praise. Many feel it wasn’t well managed, wasn’t actually created to protect the rights of employees, and was an ineffective (see ‘expensive’) way of rooting through lots of largely law-abiding folks to find a couple of bad apples.

Working out whether an employee is subject to the legislation is a complex matter, and one that – on occasion – even HMRC have seemingly struggled to get their collective head around.

Why should I care?

On the surface you might think that if employers are responsible for ensuring things are kept on the straight and narrow, you’re unaffected. But this may prove far from the truth.

Whether it’s introduced next year or later, there are actually a number of ways in which your business practices (and ability to earn) might be hit as HMRC ‘gets heavy’ with this legislation:

  1. The pressure felt by employers forces them into encouraging you to accept your existing role – but as an employee (likely on a disappointing wage, and without your beloved freedom)

  2. Your client demands you incorporate – set up as a limited company (goodbye umbrella ella ella)

  3. Your client finds someone else to take the employee gig or looks for someone else who’s already incorporated to avoid getting caught

Look out for more news. We’ll keep you updated on when, how, and for whom legislation is likely to be introduced.