HMRC has firmed up off-payroll legislation with new guidance issued in April.

With more employers and recruiters exploring IR35 solutions, HMRC has issued new guidance on Statement of Work to help them and contractors to avoid future liabilities.

“I’m aware of many incidents where Statements of Work are wrongly seen as a magic bullet to disapply off-payroll legislation and there has been a sharp increase in supposed ‘IR35 solutions’ which are simply a change in contractual wording in how someone is engaged,” said Julia Kermode of IWORK, a champion of independent workers and former CEO of the FCSA.

“My advice is simple – be very wary of these models. If a service is genuinely contracted out then a statement of work is perfectly acceptable, however simply amending the contractual wording in isolation does not achieve this and it is likely that you will need to consider the off-payroll working rules. There is no work around or solution to off-payroll, and the sooner everyone realises that the better.”

Clarke Bowles, Director of Strategic Sales at Parasol Group observes that the new guidance from HMRC on SOW has come at an interesting time.

“It would seem to be a reaction to some of the behaviours we’ve seen across the industry since the IR35 reforms in April,” he said. “How you assess IR35 is exactly the same for SOW as it is for any other engagement. Therefore, if something is genuinely outside of IR35 so long as it is accurately and fairly assessed it will be outside for both as it should always reflect the contracts and working practices, so there is an argument that actually getting to the root of the issue and amending contracts and working practices could be a better approach for many and one worth considering.

“Using a Statement of Work for genuinely outsourced services is a sensible way to ensure that expectations and responsibilities of parties are agreed and documented if it reflects the reality of commercial arrangements. However, as a way to circumvent the reforms, it is inappropriate and introduces unnecessary risk.”

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The Freelancer & Contractor Services Association (FCSA) has launched revised Codes of Compliance, which it says are tougher and even more transparent than previous versions.

Following a review that took five months, the new codes provide added assurance to agencies, hirers and contractors, according to the FCSA.

In particular, member firms must now provide more transparency to contractors, particularly in relation to holiday pay in umbrella employment contracts and on payslips.

Umbrella companies have come under repeated fire this year, with claims some unscrupulous providers withhold holiday pay and other benefits owed to workers. In April MP Ruth Cadbury went as far as to call for umbrella firms to be banned due to “significant malpractice” in the industry.

Legitimate umbrella providers have argued, however, that especially given the introduction of new IR35 rules earlier this year, there’s a clear need for such structures.

“As market conditions change so too must our codes,” said Phil Pluck, the FCSA’s Chief Executive. “This is to ensure the highest standards of compliance are continued to be met by our member firms. Which is why now, we’re announcing the launch of our latest Code revisions.

“The most comprehensive and compliant set of evidence-based standards now exist in our sector. No one else in the sector can give contractors or the supply chain this level of assurance.”

The FCSA has also introduced new pre-requisite and due diligence checks on all new applicants, which must be passed before proceeding to the accreditation assessment stage.

It said each step in the assessment process is conducted by independent and regulated accountants and solicitors, all with considerable experience in the sector. No member of FCSA staff, the board or membership are involved in this process.

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Almost 50,000 ‘mini umbrella’ companies have been created in the past five years as a way of avoiding hirers’ national insurance liabilities, according to a BBC investigation.

The File on 4 programme’s probe found that these mini-umbrella companies, or MUCs, were even being used for workers in Covid test centres run by G4S.

The MUCs are set up to exploit the government’s Employment Allo

wance, which allows companies to claim National Insurance discounts of up to £4,000 per year as an incentive to take on more workers.

Usually, employers have to pay 13.8% in NI contributions on employee earnings if they earn more than £170 per week.

Some recruitment agencies are employing large numbers of workers through a series of MUCs – as each one has only a small number of employees, it is able to benefit from the NI discount and NI is avoided for all these workers.

Typically, the MUC provider sets up a UK company with British directors, who resign shortly after incorporation and are replaced by foreign directors, making it difficult for HMRC to pursue the company.

According to the BBC investigation, the majority of these foreign directors are based in the Philippines, with some 40,000 Filipinos recruited via Facebook and word of mouth.

“It is a fraudulent employment model that presents an organised crime threat to the UK Exchequer costing ‘hundreds of millions of pounds’ in lost taxes,” commented Clarke Bowles​, Director of Strategic Sales at Parasol Group.

“As a fully compliant umbrella company, it is disappointing that non-compliant models are still operating in our industry. Once again highlighting the urgent need for regulation, something ourselves and others have been pushing for over the last few years. Regulation is the best way to prevent abuse of the tax system and to protect worker rights.”

Often workers are unaware they are involved in such schemes. The BBC report included one employee working at a Covid testing site run by G4S who didn’t know anything about the MUC paying him until he received his first payslip and noted that neither G4S nor the agency that hired him were listed.

Instead, he appeared to have been paid by a newly formed company with a director in the Philippines. In response to the investigation, G4S said when the matter came to its attention HMRC had been notified.

Is ignorance a defence?

While it is perhaps understandable that workers could be duped into working via such companies, Phil Pluck, chief executive of the Freelancer & Contractor Services Association (FCSA), questioned whether or not employers and agencies could claim to have been similarly innocent.

“Some of the examples illustrated show MUCs that were only a month old and had directors in the Philippines. It does beg the question; what due diligence did the end hirers and recruitment agencies actually do before sending contractors in the direction of these crooks?

“Clearly, we still need to help educate much of the supply chain and the contractor. FCSA and its members have produced several guides to help steer both companies and contractors away from unlawful players who are NOT umbrella firms but simply using that model as a means to steal from contractors and UK government.”

HMRC has been warning about MUC abuse since 2015, and issued new advice this week following the BBC report.

It said that business models for MUCs were constantly evolving, but that unusual company names with unrelated business activity and foreign national directors were just a few of the things companies should look out for.

It also warned: “Every business which either places or uses temporary labour should be aware of the potential dangers posed to their business by mini umbrella company fraud in their supply chain.

“Not only can a fraudulent supply chain lead to reputational and financial damage to your business, but your workers may not receive all they’re entitled to.”

The last point is an important one, agreed Bowles. “Predominantly the headlines in the press recently are about loss in tax, however workers who are moved around frequently don’t know who to look to for their employment rights such as sick pay or maternity/paternity, they may not qualify for autoenrollment pension or qualify for week 12 worker rights due to the frequency of movement.”

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