Umbrella Companies: Reasons for HMRC Crackdown on IR35 Contractors - Essay Sample

Characteristics of Umbrella Companies and Reasons for HRMC Cracking them Down

The umbrella companies determine whether the contractors should be enrolled under the IR35 scheme. The contractors work in a similar manner as normal employees, however, they bill their services through umbrella companies. Firms determined whether contractors fall in the IR35 category which requires them to pay for income taxes and employees' national insurance contribution. In case they decided to fall outside the IR35, they only paid for corporate taxes. Such actions enable the contractor to pay for corporate taxes rather than paying for the employment taxes. Her Majesty's Revenue and Customs (HMRC) consider that the contractors and the umbrella companies have been practicing tax avoidance. However, from the beginning of 2017, the government gave the directives that the umbrella companies would be responsible for evaluating the contractors who are qualified to be subjected to the IR35 scheme. In case the companies and the recruitment agencies failed to do correct classification, they would be liable for any unpaid taxes. The government expects to launch the initiative by 2020. However, the companies with less than 50 employees or those that generate an annual turnover of less than PS10.2 million shall be required to make a decision if IR35 can be applied to their contractors (Agyemang, 2019).

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Another characteristic of the umbrella companies is that they provide payroll services to their employees, process the invoices, and make required deductions before paying their employees. The umbrella companies take care of the contractor's associated administration services. Also, the HMRC requires the umbrella companies to assess their employees. The non-compliance on payroll will cost the government about PS 1.3 billion by the end by the end of 2023. However, most of the companies have sited unpreparedness in implementing the new IR35 requirements into the payroll system. Some companies are that they do not have enough understanding of the approach of implementing the new laws. The classification process for the contractors is unclear to most of the firms. Most of the companies have executed standardized approaches that have been caused more problems for the companies and the self-employed. The tax professionals caution that once the contractors are reclassified as employed, their home take pay would reduce by more than 25% because companies will pass additional costs related to the employer's national income. Moreover, the contractors would be required to meet other expenses such as apprenticeship levy. However, the HMRC argues that there is no enough evidence that shows the inability of the organisations to assess the freelancers and implement the new payroll program before April 2020 (Agyemang, 2019).

Additionally, Umbrella companies prefer hiring contractors to recruiting employees to cut costs. Companies incur few managerial costs. The new reform will increase company administrative expenses.

Moreover, contractors comply with HMRC by registering under the umbrella companies that provide tax and National Insurance contributions on behalf of the contractor. Employees under umbrella companies are entitled to various benefits and insurance covers. However, the IR35 has been uncertain about the national insurance contributions and the legal status of work for the contractors how may be subject to the new laws (Agyemang, 2019).

The Difference Between Employed and Self-Employed

Based on the type of work an individual is performing, individuals may be taxed as either self-employed individuals or employed individuals. There are various arguments that help to differentiate the two types of employment.

Income

Most self-employed people earn more than per working hour than employed people. However, the workflow is always irregular especially if an individual has not built enough contacts with clients. During such times, self-employed persons are likely to earn low pay. However, when self-employed people have an adequate number of clients they are likely to reap huge sums of money. Therefore, self-employed individuals must maintain competitiveness in the market by providing competent rates and constant advertising to reach potential clients. However, the employed people have fixed payments over the years and they are likely to earn more through company promotions and bonuses (Green, 2019).

Control, Substitution and Mutual Obligation

Self-employed can be differentiated with the employed individuals based on each group performs the task. In case the client provides the contractor with guidelines of performing the tasks such as how, when and what specific tasks should be performed, the worker is referred to as an employee. Moreover, employees are required to perform tasks themselves and they are not allowed to make any substitution. Therefore, the employers' role in providing tasks to the employees who are to be done to specific individuals. However, when self-employed are given the freedom to perform the tasks themselves, and they can freely substitute their duties they are known as self-employed (Green, 2019).

Taxes

The employers have an obligation to pay taxes of their employees to the tax authorities. The employees pay their taxes through a PAYE program. Under the IRS program, the employees are supposed to pay the following taxes; Social and Medicare taxes that are levied based on the employee's income and shared between the employer and the employee. Also, in these taxes, employees are supposed to a minimum of 7.65% and a maximum of 15.3% of their salary. The employers must also pay for the federal income taxes which are sent to the IRS by the employer. Additionally, they must pay federal unemployment tax which for their unemployment benefits (Murray, 2019).

However, self-employment taxes are paid by the business owners to the social Administration for purposes of social security and Medicare. Self-employed individuals pay a tax rate of 15.3% for social security and Medicare. The security administration provides the maximum social security tax for self-employed individuals. They are taxed based on the profits they earn (Murray, J. 2019).

Workplace Pension

Employees enjoy the benefits of the workplace pension. It is a legal requirement that all employers should enroll their workers in the pension program. The law requires that both the employer and the worker must contribute to the program. However, or the self-employed individuals, they are responsible for their own pension schemes (Green, 2019).

Insurance

The law requires that businesses should take insurance policies that take the employee's illnesses and injuries. In such circumstances, companies are able to pay employees claims for compensation. However, self-employed individuals must take insurance policies (Green, 2019).

Job Security

Self-employed persons are more secure than employed persons. Self-employment enables individuals to decide then the next sources of income look for new clients and chase foe new opportunities. Employed individuals do not have reliable job security since the employers decide to make decisions of when demote or terminate the workers (Green, 2019).

How Peter Can Improve His Position in the Future

Peter as an IT business analyst, could be deprived of his status as a self-employed contractor when the complex IR35 shall be implemented. He may longer enjoy the benefits of being self-employed anymore (Agyemang, 2019). However, all is not lost; he can still improve in status in the future in various ways.

In case of any disagreement between Peter and his clients, he may challenge the decision. The HMRC's reforms on IR35 provides that people who disagree with their clients on the tax status decision should challenge them by providing the disagreement process that was used to breach the terms of the agreement. However, the practical details of providing addressing the complaints have not been provided by the HMRC. The grievances will enable complainants to appeal for the determination of the disputed process. Therefore, in case peter will be unsatisfied with the clients' decisions he should alert the HMRC (Agyemang, 2019).

Moreover, when the IR35 becomes effective, Peter's salary will reduce and as a result, he may not afford to cater to recurrent bills such as social security and Medicare. Therefore, he should seek assistance from the employment tribunal and demand for employment rights like other employees working for the company. However, employees should be cautious of the open inquiries from the HMRC since they may be required to state their previous status. Therefore, Peter may consult the tribunal to seek for his employment rights (Agyemang, 2019).

In addition, Peter can also make enquire about the assessment process from the clients and recruitment agencies. Through inquiries, he can predict the employment status that he is likely to be awarded. Also, accountants and tax advisers could be essential sources of information regarding his employment status (Agyemang, 2019).

Conclusion

To sum it up, umbrella companies have the mandate to ensure that all the contracts comply with the IR35 reforms. The organisations must help them HMRC to ensure that contractors no longer practice tax avoidance. Also, there is a difference that helps to distinguish the employed and the self-employed including the level of control, substitution, and mutual obligation of a task and income. Moreover, subject to different types of taxes the from the article freelancers face looming a nightmare, provides various ways that contractors such as peter can use to ensure that that the IR35 reforms do not compete for shutter their employment status completely. The contractors are allowed to complain to the HMRC in case there s a dispute between the employees and the clients on the employment status. The contractors can also demand employment rights through the tribunal.

References

Agyemang, E, 2019, Freelancers face a looming tax nightmare | Financial Times. [online] Ft.com. Available at: http...