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IR35: FCSA defends Charter change that lets umbrella firms operate offshore setups

Umbrella company accreditation body has moved to clarify the rationale behind a recent tweak to its membership charter amid accusations it could harm the sector’s reputation and encourage offshore tax avoidance

One of the UK’s main umbrella company accreditation bodies has denied that a recent tweak to its membership charter will put IT contractors at a heightened risk of joining offshore tax avoidance schemes.

The Freelancer and Contractor Services Association (FCSA) revamped its membership Charter in March 2021 to include a change that appears to reverse its long-held ban on letting the 60-plus umbrella companies it represents operate offshore solutions and structures.

In its previous form, the Charter stated that all of the Association’s members must be UK-based firms that “do not provide any offshore solutions/structures”, but the revamped Charter states they now can, provided their offshore operations do not make up more than 25% of their business.

While the Charter change came into force seven months ago, the development appears to have passed some of the FCSA’s members by, with several parties privately telling Computer Weekly they were unaware until recently that the Charter had been changed.

The news pages on the FCSA website also make no mention of the change, despite the Association publishing a press release in July 2021 to announce an update to its Codes of Compliance.

The development has promoted several umbrella market stakeholders to privately raise concerns to Computer Weekly about the impact the change could have on the reputation of the industry, given the links between offshore structures and tax avoidance schemes.

To this point, offshore structures and schemes are sometimes used by non-compliant umbrella firms to help the contractors on their books avoid paying tax on their earnings. They do this by opting to pay part of the contractor’s salary in the form of non-taxable loans or annuities, which are typically paid out by the umbrella through an offshore trust.

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Crawford Temple, CEO of Professional Passport, a company that provides compliance assessment services to umbrella companies, told Computer Weekly: “This revelation that the FCSA is allowing its members to use offshore models is shocking. We have seen many reports of non-compliance operating in the sector and clearly offshore structures have come under close scrutiny along with other forms of disguised remuneration.

“Our [umbrella] sector has come in for a lot of criticism of late and the news that the FCSA is permitting offshore structures will be damaging,” he added.

Indeed, the role that umbrella companies play in the extended end-client to contractor supply chain has been called into question recently, with the Trades Union Congress (TUC) calling on the government in August 2021 to ban them from operating in the wake of reports of industry-wide malpractice.

These include reports about umbrella company contractors being denied holiday pay and having unnecessary deductions taken from their pay packets.

This in turn has led to repeated calls from MPs and contracting market stakeholders for the umbrella industry to be regulated. In the meantime, the FCSA and Professional Passport provide accreditation for firms in the sector that want to demonstrate they operate compliantly.

“This news [of the Charter change] now reinforces the fact that Professional Passport is the only compliant standard that strictly prohibits any money being transferred offshore or workers being paid money from offshore,” continued Temple.

“Such malpractice provides a serious risk to the entire supply chain, contractors, agencies and hiring clients, and we vehemently oppose it.”

FCSA accreditation as a point of competitive difference

The FCSA’s previous stance on not letting accredited umbrellas run offshore structures is featured in the marketing materials of several of the Association’s members, including Parasol, whose Companies House accounts have it pegged as a £402.8m turnover firm.

In a statement on its website, the company flags the fact that FCSA accredited umbrellas cannot operate offshore schemes as an important point of differentiation.

“FCSA accredited members cannot operate offshore schemes, loan schemes or trusts,” as stated on the Parasol website. “This is vital following the Loan Charge fallout, which saw tens of thousands of people handed retrospective tax bills after working through disguised remuneration schemes, which paid them through offshore accounts.

“Needless to say, umbrella companies with FCSA accreditation offer peace of mind to contractors who understandably want to avoid entering illegal arrangements at all costs.” 

According to the April 2021 How contracting should work report by the Loan Charge All Party Parliamentary Group (APPG), FCSA members collectively employ 170,000 contractors across the UK.  

All FCSA accredited umbrellas are expected to abide by the Association’s membership Charter, and observe “the highest principles of ethics, integrity, professional conduct and fair practice” while conducting their business, the document states.

In a statement to Computer Weekly, FCSA CEO Phil Pluck defended the Charter change, and said the Association has “always allowed” its members to run up to 25% of their operations offshore within its Codes of Compliance.

“FCSA recognises that companies in all sectors of the UK economy now have business to business relationships outside of the UK, particularly in back office functions and with contractors who have multiple work locations,” said Pluck.

“In order to allow FCSA members to remain agile, and to reflect the international nature of the whole supply chain, the FCSA has always allowed companies within its membership to operate up to 25% of its operations outside of the UK. Not to do so would be anti-competitive.”

Rigorous codes

Expanding on this point, Pluck said the “rigorous FCSA codes” state that member companies must have “at least” 75% of their organisations run from within the UK.

“This ensures that the FCSA member is a UK tax resident and subject to UK employment law, thereby protecting the contractor and supply chains and allowing the FCSA to assess those companies against UK legislation as well as the enhanced best practice standards that sit within both our codes of compliance and our Charter,” he said.

The Charter has “simply been revised to reflect the extensive protection provided by the Codes of Compliance”, said Pluck, “to ensure that both contractors and the supply chain are giving the protection and assurance the FCSA badge of compliance brings with it”.

He continued: “The FCSA does not permit members to pay workers operating in the UK in a way that seeks to avoid UK taxation by routing money or transactions outside of the UK.”

An umbrella market source, who spoke to Computer Weekly on condition of anonymity, backed Pluck’s assertion that FCSA members have been able to operate part of their business overseas for some time, but said the ambiguity of the reworked Charter’s wording is a red flag.

“Given the FCSA has never previously allowed any offshore tax structure, I don’t see why they would suddenly start. Nevertheless, the updated wording is sloppy because it does state that offshore is okay.

“The FCSA has never previously allowed any offshore tax structure – I don’t see why they would suddenly start now,” the source continued. “It could be sloppy wording, but the other explanation is that [they’ve made a] deliberate policy decision to allow members to have tax structures overseas, which is an absolutely massive, fundamental change.”

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