Improved cover for freelancers and contractors, PSCs and Umbrella companies
Posted on 1st May 2019 by Phil Ainley MCIM CMktr
Those involved with the contractor and freelancer community, and who operate through a PSC, know only too well that HMRC is intent on addressing non-compliance believing that millions of pounds are lost every year in revenue to the Treasury.
The Government estimates that only 10% of PSCs that should pay tax under IR35 do so.
IR35 has been an ongoing theme for many years. In April 2017 the government took action to get its own house in order and looked to transfer the IR35 decision making responsibility from PSCs (Limited companies operated by contractors and freelancers) to public sector engagers.
Hailing the move a success and raising millions in extra tax HMRC announced in October 2018 a similar strategy to deal with IR35 non-compliance in the private sector.
Whilst delayed until April 2021, HMRC’s intentions are clear by offering only a one-year window to allow compliance.
Now is the time to take action.
Increased vulnerability for PSCs
On the face of it, from April 2021, the change will remove the responsibility for IR35 status decision-making from PSCs engaged by medium and large businesses. This will make contractors vulnerable to processes created by others above them in the chain.
It seems clear that agencies and not end clients will fulfil the role of fee-payer. Accordingly, agencies are taking action now and are planning for 2021.
PSCs may find that any future decisions will be taken above them in the supply chain.
They will also find the agency, more so than the end-client, will hold the key to making the right decision as to their IR35 status.
To this end, PSCs need to look after their own interests and that process should start now!
PSCs’ current engagements should be reviewed for the following reasons:
- In the short term nothing changes for PSCs – you’re the decision maker and the entity that could suffer the tax liability. If you get it wrong, HMRC will want tax and interest from you and further questioning will follow. If your due diligence is poor a penalty of at least 15% of the tax at stake can be applied.
- If your PSC is engaged by one of the UK’s smallest 1.5 million businesses (as defined by the 2006 Companies Act) your responsibilities will continue as is after April 2021.
- HMRC has suggested that they want PSCs to be “looking forward” but they haven’t ruled out “looking back” at a PSC’s affairs. It makes good sense to look at where you stand now.
- Agencies and end clients will seek evidence from PSCs regarding their IR35 status. If HMRC challenge a decision over status, it is harder for them to win their argument if all parties (PSC/agency/end client) have agreed the status decision.
A fully comprehensive IR35 contract review.
It is important to bear in-mind that there is no such thing as an ‘IR35-proof contract’. HMRC will not simply look at what is written in your contract to confirm compliance. They will look at exactly how your working relationship is between yourself and your end-client.
Each written contract will only be accepted if it accurately reflects the circumstances of your work engagement.
A contract review will check that clauses in your contract are compliant and that your working practices follow terms and conditions in your contract.
You will receive a report (usually in five working days), including any recommendations, which considers both the contractual terms and working practices based on case law and an unbiased, independent opinion which could save you thousands of pounds if HMRC do start an enquiry.
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