Where a contractor operates via their own personal services company (PSC), work performed for large or medium-sized clients in the private sector may now fall under the ‘off-payroll working rules. This is a new version of IR35, which requires the end client to decide whether there is a deemed employment relationship for tax purposes with the contractor. If there is such a relationship, the end-client (or any other fee-payer in the contractual chain, such as an employment agency) must deduct PAYE and employees’ National Insurance Contributions (NIC) when paying the PSC’s invoices, as well as accounting for employer’s NIC.

These new arrangements have meant that many contractors have been pushed into working via so-called “umbrella companies”.

The contractors become employees of the umbrella company instead of their own PSC. The umbrella company operates PAYE for the contractors and takes a cut of the fees. It should provide each contractor with an employment contract and payslips.

In addition, the umbrella company should give each worker a breakdown of the assignment rate received from the employment agency and list its
costs, including the employer’s NIC. The employer’s NIC should not be deducted from the worker’s contract rate.

Some umbrella companies try to boost their profits by bending the law to take advantage of tax breaks designed for small companies. One method is to form multiple small companies (“mini- umbrellas”), each of which employs just one or two people. This allows each mini-umbrella to claim the Employment Allowance, worth up to £4,000 per year in the employer’s NIC savings. The mini-umbrella company may also be dissolved before it pays any corporation tax.

If you suspect you are a contractor caught up in a mini-umbrella scam, talk to your ultimate customer, and warn them about potential fraud in their supply chain.

If your business uses temporary workers, be sure to carry out due diligence checks on your supply chain and be clear about who pays those workers and how they are paid. Alarm bells should ring if your workers have been promised non-taxable pay, higher take-home pay, or have been asked to sign a loan or annuity agreement.

We can help you understand the full implications of the new off-payroll working rules and advise you on the complications that umbrella arrangements can bring.

REF: Beware of IR35 traps