Three quarters of contractors are unable to tell the difference between a compliant umbrella company and a tax avoidance scheme, a new report has found.
A survey of 3,000 contractors conducted by IR35 Shield found 74% of respondents said they are currently unable to tell if an umbrella company is compliant, making them vulnerable to tax avoidance schemes.
HM Revenue & Customs (HMRC) is set to extend its IR35 off-payroll legislation to include the private sector in April this year. The reforms were originally due to come into effect in April 2020, but were postponed due to the Covid-19 pandemic.
The reforms will change the way private sector employers engage with contractors by placing the onus on them to assess IR35 and determine if contractors should be taxed as full-time employees. These reforms were implemented in the public sector in 2017.
Many employers have banned working with personal service companies (PSCs) going forward to avoid the administrative burden of having to assess IR35.
A key way for contractors to engage with employers will now be through ‘umbrella companies’, as many employers have said they will engage with contractors through these companies instead of PSCs.
In the past, some contractors have chosen to work through umbrella companies as they will handle the tax admin. However, it is not a desirable alternative for many contractors as all of their pay is subject to Paye, regardless of their contract’s IR35 status.
The survey by IR35 Shield found that while 62% of respondents have been offered to trade via an umbrella company rather than through a PSC, only 8% said they would be happy to do so. Meanwhile, three quarters of respondents (74%) said they were unable to distinguish between a compliant umbrella company and a tax avoidance scheme.
According to the survey, a quarter of respondents also said their client has already imposed a ban on PSC contractors, while just 32% of respondents said they were confident they would remain with their current client once the new rules come into effect.
Last year, Aegon, Royal London and Schroders told New Model Adviser they would no longer take on contractors who operate through a personal services company (PSC) following reforms.
Dave Chaplin, CEO at IR35 Shield, said: ‘We have just a few months until [the new] off-payroll takes effect in the private sector and it seems that half of the market is leaving compliance until the very last minute. This is likely to cause some severe repercussions for hirers and contractors.
‘Blanket bans on limited companies are an expensive way for firms to hire less talented professionals, while handing a competitive edge to their competition. Firms need to realise that if they apply best practice and with the correct contracts in place, they can continue to hire the best contractors with confidence.’