Well here is something a little different and it may not be what you were expecting! Instead of a directory of organisations, we wanted to create a directory of the various pieces of legislation that could potentially impact contractors, umbrella companies and recruitment agencies.
What legislation affects contractors and freelancers in the UK?
It’s no secret that there is loads of legislation that affects the temporary workforce – and rightfully so. We’ve summarised the key pieces of legislation below and have included some useful links. If you think a piece of information is missing – please let us know by emailing firstname.lastname@example.org. We would also love to hear from legislation experts and legal advisers. If you’re interested in writing a guest piece to help our audience – it’d be greatly appreciated!
IR35 (or off-payroll working rules) has become a bit of a buzz word in the contracting and freelancing industry. The legislation was first introduced in April 2000 to stop contractors working as disguised employees, by taxing them at a similar rate to full-time employment.
The off-payroll working rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay a similar amount of tax and National Insurance (NI) as employees.
Off-payroll was introduced into the public sector in 2017. Until this point, contractors could choose to work inside or outside IR35. However, it is now the responsibility of the end client (or hirer) to assess the IR35 status of the worker.
Off-payroll in the private sector is due to be rolled out into the private sector in April 2021. In a similar way to the private sector, it will be the end client’s responsibility to conduct and IR35 status assessment for each worker or role.
If a worker is deemed “inside IR35”, it is the responsibility of the fee payer to ensure the correct amount of tax and NI is deducted at source before the worker can be paid.
It is important to note that one of the main benefits for contractors working through an umbrella company is that they do not need to worry about IR35. This is because umbrella companies already make all the necessary tax deductions before paying contractors and are therefore already compliant with the legislation.
Keep an eye on our dedicated IR35 page for all the latest updates and information about the legislation.
Offshore intermediaries and tax avoidance
Offshore intermediaries or tax avoidance schemes are companies which are set up with the sole purpose of increasing a worker’s take home pay by paying less tax – through a trust, job board or loan scheme.
The companies claim that the payments are different from regular income and are not subject to Income Tax and National Insurance. However, this is not the case, and HMRC has stated that these payments are no different and tax-deductible.
Although this may sound tempting, we strongly recommend workers avoid engaging with these companies at all costs – as the consequences can be devastating.
Luckily, there are some tell-tale signs which are a good indication that off-shore intermediaries are trying to disguise themselves as compliant umbrella companies, and these are:
- They advertise 90% take home pay
- They claim to be “approved by HMRC” or “IR35 compliant”
- HMRC has assigned them a Scheme Reference Number (SRN)
- They advertise umbrella solutions that are better than PAYE
- They will try and hide their registered office, or it will state they are from a known tax haven such as the Cayman Islands or the Channel Islands
HMRC is cracking down on contractors engaging with tax avoidance schemes and will reclaim any tax that has been underpaid – as evidenced by the implementation of the 2019 Loan Charge (this is explained in detail below).
We cannot stress enough the importance of conducting thorough due diligence checks to ensure the provider is compliant and operates per UK tax law. An easy way to do this is only ever to consider using FCSA accredited umbrella companies or contractor accountants as all of their internal processes have been audited to ensure they abide by HMRC regulations.
Travel and subsistence
Before April 2016, umbrella workers were able to claim tax relief on a range of expenses, particularly concerning travel and subsistence. However, effective of that date HMRC introduced legislation restricting these expenses.
HMRC believed that each engagement was a separate employment contract, and therefore workers are considered permanent employees for the duration of that contract. Therefore, contractors operating under supervision, direction and control should be treated the same as permanent employees (for tax purposes).
An excellent example of the legislation in practice is permanent employees are unable to claim the cost of a daily commute or meals purchased at work. Therefore, neither should a contractor working in the same environment (albeit for a potentially shorter period).
The Loan Charge
Initially introduced in the 2016 Finance Act, the Loan Charge was implemented in 2019 to help HMRC reclaim underpaid tax by workers who had engaged with a disguised remuneration, or tax avoidance scheme in the past.
Unfortunately, these loan schemes were often recommended to contractors and self-employed individuals by their financial advisors or accountants. As a result, the legislation has faced a lot of scrutiny. Although many contractors engaged with the schemes knowing they were unethical, others were misled and were unaware they were using a tax avoidance scheme and are now facing large tax bills.
Under such schemes, workers would have their income paid in the form of a loan – which replaced part or all of their salary. While the worker would pay interest on the loans, it meant they didn’t have to pay Income Tax or National Insurance (NI) as loan proceeds (unlike regular income), are not subject to standard tax deductions.
HMRC argued that as these loans were not designed to be repaid, the payments are classed as regular taxable income. Initially, the Loan Charge gave HMRC to power to retrospectively reclaim tax as far back as the 6th April 199. However, an independent review led by Sir Amyas Morse meant that the legislation only applied to unpaid loans made on or after the 9th December 2010.
Detailed guidance about the Loan Charge review and changes to the legislation can be found on the government’s website.
Criminal Finances Act
The Criminal Finances Act came into effect on 30th September 2017. It was introduced as a way for HMRC to target and prosecute companies (particularly recruitment agencies) who are facilitating tax avoidance and tax evasion.
Recruitment agencies can be found guilty of non-compliance if they are found to be promoting a tax avoidance scheme, or referring their candidates to offshore and unethical payroll and accountancy providers.
Even if only one consultant in the entire agency has been facilitating tax avoidance, the whole company is automatically liable.
The Criminal Finances Act makes businesses liable for the actions of their employees, suppliers and other ‘associated persons’ who are facilitating tax avoidance. It is more important than ever for agencies to conduct thorough due diligence and have a compliant Preferred Supplier in place as non-compliance could result in unlimited fines and custodial sentences.
Agency Workers Regulations
The Agency Workers Regulations (AWR) came into force on 1st October 2011 and gives agency workers the entitlement to the same or no less favourable treatment for employment and working conditions as their permanent counterpart in the same job.
AWR comes into effect after the temporary worker has completed the 12-week qualifying period with the hirer and is accumulated even if the worker only works a few hours a week.
Equal working conditions concerning AWR, include:
- Access to on-site facilities such as the car park, canteen and drinks machines
- Fair treatment by the hirer;
- Access to internal information regarding job vacancies from the first day of the assignment (Day 1 entitlement);
- Matters relating to pay and salary, including payment for annual leave, overtime, allowances, childcare vouchers and lunch vouchers;
- Access to rest periods and equal working hours, as well as existing rights under Working Time Regulations 1998 legislation.
Further information about AWR can be accessed on the government’s website.
We’re here to try and help as many contractors as possible make informed decisions about their payroll. We cannot stress this enough – please only use a compliant umbrella company, accountant or payroll provider.
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