IR35, Agency Workers and the Twist
Contractors are rightly concerned about what happens when agencies refuse to pay their limited companies next year; will they have to close their companies, and then will they remain at risk of HMRC retrospectively assessing their company income under IR35 legislation? For how long?
This is an issue, but there is a twist in this tale, a twist so large as could be described as as tornado, but contractors can take steps to shelter themselves and that starts with understanding the legislation that applies to them.
It’s true to say that few contractors who work on agency contracts understand the laws that surround them, but bringing this knowledge to their attention is down to a few honest tax advisers, because HM Revenue & Customs is unlikely to do it. It seems that most professional advisers have little understanding either, but if they do, advising contractors to close their companies and use umbrella companies post April 2020, is inadequate advice to the point of negligence in some cases. It is wrong to keep contractors in the dark about legislation that could actually help them to avoid massive tax debts, but that’s going to be put right here….
The Legal Bit
When agency workers are not working under supervision, direction or control, then agency legislation does not apply (see link below). In that case, it is lawful for agencies to pay agency workers on a self-employed basis. The use of limited company contractors, rather than sole traders, just added a layer of protection for agencies and their clients, as sole traders are entitled some rights under employment law. Or so they were told by their advisers.
Mainly, the move towards “Ltd only” by agencies, avoided the need to assess each and every worker as to the level of supervision, direction control they work under, and for the rest being paid under PAYE umbrella companies, there was no necessity to even assess workers’ status under agency legislation. So, it’s easy to see that the rise of limited companies and umbrella companies in the temporary labour market, was little more than a huge administration saving exercise, rather than a tax avoidance measure, but has adversely affected lives in as many ways as it has proven advantageous.
With the introduction of the off payroll working rules leaving the responsibility for the tax debts of limited companies with the company that pays those companies, in the run up to April 2020 agencies are seemingly reluctant to pay workers who are contracting through limited companies, some even before that date.
However, if agency workers are working under supervision, direction or control, which is what agencies are effectively saying in order to justify the move away from offering work to limited company contractors, that it’s likely agency legislation applied all along is not a great stretch of the imagination.
Enter HMRC, which slipped in a definition that identifies an agency worker’s intermediary, that is his or her limited company, as an employment intermediary, which must therefore consider agency legislation; it has always stated that the agency legislation supersedes the intermediaries’ legislation (IR35). HMRC also stated the following;
‘Genuine dividends from the PSC would not normally be considered to be remuneration for the purposes of the Agency legislation. However in cases of avoidance there may be instances where HMRC argue that these payments are remuneration either as general earnings or as remuneration for the purposes of the Agency legislation. ‘
Few tax advisers spotted this and even fewer contractors did too, so if HMRC considered a contractor was involved in any form of tax avoidance, any dividends could be ‘looked through’ and in that case agency legislation would apply to limited companies contractors more often than IR35.
Under agency legislation, both the agency and the agency worker’s limited company are employment intermediaries, and if the worker is working under supervision, direction or control, and didn’t operate PAYE on all the income generated under the contracts with each agency, then agencies, being deemed the first intermediary, bear a responsibility for the PAYE debt if it remains unpaid. So it’s clear to see that the mistake the advisers to the recruitment industry made, was to lead agencies to believe that the use of limited companies left any risk of tax debt with the company directors under IR35.
Closing a limited company is problematic where the director is aware of a potential tax debt, or this is done to avoid an impending HMRC enquiry. Company closures must always be handled carefully, and where agency legislation is involved, even more so. This is because taking steps to shift any potential debt arising under IR35, to consideration under agency legislation, serves to pass the debt to the agency, particularly where the agency required the worker to be paid via his or her limited company, and in all cases where the director cannot afford to pay the tax debts of his old company in reasonable time.
If you consider that closing your company when the off payroll working rules start to affect your future as a contractor is the safest option, generally an accountant will close the company for a fee, having filed a final set of accounts, and then the accountant will disengage with you as a client. If you are unfortunate enough to be involved in an IR35 enquiry, you would then need to engage a specialist, who would not have first hand knowledge of the engagement in question. Additionally, you would be up against an opinion of the agencies that you contracted with, to the effect that IR35 applies, which HMRC will be using as evidence. At that point, it would look like a lose, lose situation.
With the odds stacked against you, the alternative is to use a specialist accountancy company now to potentially redress the balance later. The specialist accountant will action the company closure with an analysis of the contractor’s position under IR35 and agency legislation up to the point of closure, and that may be that. However, if an enquiry ensues and if agency legislation applies, as this supersedes intermediaries’ legislation, this argument will be made with HMRC and it could deflect the tax debt.
Unlike IR35 insurance policies which only cover the fee income of the tax specialist and are never offered when an enquiry is expected or ongoing, a company closures under this method is like a free insurance policy, which may avoid contractors having to pay tax debts, in the event of a retrospective IR35 enquiry being raised by HMRC.
If you are thinking of closing your company due solely to the introduction of the off payroll working rules and your company income was generated on agency contracts, don’t close your company without speaking to CWC Solutions first, call us or use the contact page to get assistance with putting your exit strategy safely in place.
Useful Link – The Interaction of Agency Legislation and IR35
Agency Legislation The 2014 amendment ESM 2034