It’s not often you thank the tax office
But there’s new legislation coming into force in April 2021 that might find you doing just that if you are an umbrella company.
Most of our readers will have heard of IR35. It’s a piece of legislation that plugs a loophole and ensures contractors are paying tax correctly. It also protects the rights of people who are effectively working as employees, but because they are treated as self-employed, are not receiving the benefits they should.
To comply with IR35, contractors need to carefully word their contracts and demonstrate by the way they work that they really are ‘in business on their own account’, as the HMRC describes it, and not a ‘disguised employee’.
The three key areas that determine whether IR35 regulations apply are obligation, substitution and control. If they are self-employed, there is no obligation to carry on working with a company once a contract has finished. If they are unable to complete the work, they can substitute themself with someone else capable of doing it. And as a self-employed contractor, they have total control over their working hours and times.
If any of these three factors don’t apply, the ‘contractor’ is likely to be viewed as an employee.
How does this affect umbrella companies?
As an umbrella company, you are well placed to support your customers and make it easy for them to comply with the IR35 legislation. You are already IR35 compliant in that you tax your employees in the standard way any employer would. And we would suggest that the service you offer may well be attractive to freelancers and contractors with limited companies who have contracts that are deemed to be inside the IR35 legislation.
Potentially, umbrella companies could see a real uptake in new customers. An Association of Professional Staffing Companies (APSCo) survey suggests that 91% of professional recruitment companies expect the use of umbrella companies to soar as a result of the changes.
So it’s worth spending a little time getting prepared to take advantage of this growth and making sure that you stand out from the crowd. Here’s our checklist of things to get sorted:
- Make sure your payroll systems are up to scratch – you don’t want to find you are limited by the number of pay packets you can process.
- Review your processes, such as those around consolidated earnings, to ensure they are efficient and can cope with an influx of new accounts.
- Consider becoming FCSA accredited or an APSCo affiliate – it shows your customers that you are working ethically within the law and that you are financially stable.
- Think about your messaging and how to communicate what you offer. Unfortunately, we are likely to see more unscrupulous umbrella companies spring up to take advantage – how will you set yourself aside from them?
- Look at offering a package of additional benefits – this can be done yourself if you have the resources, or you may find it more efficient to outsource to a trusted third party who can organise and run benefits on your behalf.
If you do decide to look externally to source benefits for your customers, look for a company that can provide a wide range of wellbeing, financial and health benefits.
Are you starting to get enquiries from contractors regarding IR35? Do let us know your thoughts and let us know how you are preparing for the move.