SUPPLY SIDE – Janet De-Havilland MD & CEO of Pendragon Consultancy Ltd asks if recruitment businesses are aiding non-compliant umbrellas.
Tax planning for contractors has been around since the inception of IR35. Roll forward to present day 2019 and there are a proliferation of tax avoidance schemes, like rats feeding on unconscious victims in most cases.
Whilst tax planning is not in itself illegal or tax evasion, some very clever people on the Isle of Man, Mauritius, Cyprus, Malta and Panama supported by QC’s from the UK saw an opportunity to get a larger slice of the pie. Historically tax planning of this nature was the afford of the rich and famous, contractors would never have met the sort of people who offer access to such clever and interesting solutions to reduce their tax liability. I do not use the words clever or interesting to glorify these schemes but to demonstrate that, it is exactly because they are such, they are able to sound so persuasive. As a business model turning something aimed only at the rich and famous, in a relatively short time into a mass market money machine would under normal circumstances be considered ahead of the game and even pioneering!
But by 2017 IR35 changes in the Public Sector breathed new life into what was becoming a diminishing market. Anecdotal and actual evidence suggests there have been over 20 new entrants into the umbrella market peddling tax avoidance solutions, signing up a further 40,000 contractors backed by the same old players into the market since 2000. Since then the NHS has become their largest single target as an entity, sadly the victims are all the contractors within the NHS, which it seems NHSI and HMRC are powerless to protect be it, due to poor enforcement, laws on offshore jurisdiction, turning a blind eye, and it would seem not enough investigative expertise within HMRC although they do have the Connect system. I know many specialists, who have been able to gather the evidence that HMRC doesn’t seem able to find and even when information is passed on, nothing changes, instead they choose to pursue contractors because they are considered low hanging fruit. Many of you will have read some of the heart-breaking stories of those caught up in this web unknowingly, or because their agency has forced them to use one of these schemes or they turned a blind eye to the umbrella companies paying people through these schemes. There is enough legislation in place to combat the problem, Criminal Finance Act 2017, Loan Scheme Charge 2019 and MSC legislation to name a few, but still there are no clear signs that HMRC are even making a dent.
Agencies have in some cases become susceptible to the high referral fees on offer of £500-£1000 per timesheet at the top end and £250 at the lower end, but why? Having spoken to many recruitment business owners/directors recently, and even back when I was a recruitment business owner, it seems they feel they have no option! Contractors are demanding to use these schemes to increase their take home pay, and if the agency refuses they will lose those skilled contractors to the competition, and that for them is commercial suicide. It has been said to me “you can try to be the most compliant agency in the market, but that’s not much good if you go out of business within months”, because enforcement is so inadequate. Most of you will understand that rational and as a business owner in the Umbrella employment market, I do; however, I would caveat that with isn’t the risk of losing everything that you have built and worked for, costlier than losing a few contractors to the competition? Each Agency can assess just how much risk they are willing to shoulder. How do those agencies who don’t indulge in these practices make it work? That isn’t a question I’m going to answer in this piece, but suffice to say it is possible and the vast majority of recruitment businesses are able to avoid being seduced or turning a blind eye to these schemes; and have stronger sense of duty of care to their contractors and the wider supply chain they service on behalf of their clients.
Umbrella industry bench mark, FCSA has had great success advising and consulting with government, and as a result two of the NHS frameworks are moving to only accepting accredited only members via Agencies. Pendragon Consultancy is proud to have joined this venerate club of accredited members.
The government is currently drafting legislation for the regulation of Umbrella companies which will be introduced in 2020, so let’s hope these law makers can come up with a true and honest definition of what constitutes being an umbrella company in the first instance, it is certainly not those peddling tax avoidances schemes to contractors with little or no regard of the consequences, which are now being felt.