IR35 private sector reforms: Recruitment industry urges chancellor to halt April 2020 roll-out

Understanding umbrellas

Umbrella schemes are typically used by contractors that want to outsource many of the day-to-day business processes associated with running a limited company or PSC, while also providing a means of ensuring participants comply with the IR35 rules.

Any work the contractor does will be paid by the end-client directly to the umbrella organisation, which will extract its fees and pass on the remaining sum as a salary to the individual, who will be liable to pay PAYE and national insurance contributions on the income they receive.

The government is currently tightening up regulations on how umbrella companies operate, but until this work is complete, there are “huge opportunities for avoidance”, the letter says.

For instance, there are examples of umbrella companies that promise to increase the amount of take-home pay contractors receive for the work they do by remunerating them through non-taxable loans and credit, rather than a conventional salary.  

IT contractors’ participation in such schemes is currently the subject of a separate disguised remuneration clampdown by HM Revenue & Customs (HMRC). Known as the loan charge policy, this has seen thousands of IT contractors saddled with six-figure retrospective tax bills relating to work they did up to 20 years ago.

The policy has been linked to at least seven suicides, and is known to have caused hardship and distress to people caught within its scope. This, in turn, has led to the government introducing a series of amendments to the policy, which the IT contractor community has criticised strongly.

“Our primary concern is that the effective regulation of umbrella companies that the government has promised will not be in place in time for April – creating huge opportunities for avoidance to occur,” says the letter.  

As detailed in the letter, if the government continues to push ahead with the reforms, a repeat of the issues caused by the loan charge policy could on the cards, which is precisely why the government should be pressing pause on its IR35 extension plans, the letter warns.

“The roll-out of the loan charge showed us what happens when badly designed changes are implemented,” it says. “The government must be prudent and apply lessons from the loan charge to the IR35 reforms in the private sector.”

Ahead of the December General Election, the government set out plans to conduct a review of the IR35 reforms, details of which it announced earlier this month. But that review is focused on ensuring that the “implementation” of the reforms is conducted in a smooth and successful way.

The letter calls for an additional review of the changes to be undertaken, following in the footsteps of the loan charge review by being chaired independently.

“This would enhance the legitimacy of the government’s final position and win business confidence,” says the letter. “Businesses need reassurance that the reforms will be fair and clear and won’t leave them vulnerable to unnecessary tax risks.”

The letter was coordinated by industry body the Recruitment and Employment Confederation (REC), whose CEO, Neil Carberry, reinforced the importance of the letter’s contents and called on the chancellor to commit to delaying the reforms.

“The extension of IR35 into the private sector, as it currently stands, will punish ethical businesses, harm workers and provide the environment for non-compliance to thrive,” he said. “We need to get the rules right, deliver on regulation for umbrella companies and have proper enforcement in place before pressing go.”

Carberry added: “Delaying will allow MPs to properly take stock of the impact the legislation will have.”

The REC is far from the only group to have urged the government to call a halt to rolling out the reforms to the private sector. Various contracting stakeholders have issued warnings over the past 18 months about the economic risks of pressing ahead with the plans.