A group of MPs blast ‘flawed’ IR35 rules and urge government to tackle the ‘wild west’ supply chain exploiting contractors
The Loan Charge All-Party Parliamentary Group (APPG) have published an inquiry into How Contracting Should Work, which exposes “significant” non-compliance in the supply chain. It also urges the government to rethink IR35 reform – introduced in the private sector earlier this month – arguing that it has “led to the increased proliferation of umbrella companies” that are “all too often exploiting contractors”.
The report goes on to state that IR35 has failed to prevent tax avoidance from so-called disguised employees – instead it has “ironically muddied the waters” and made it harder to “define contracting”.
The inquiry found that some contractors, including instances in the public sector, have been recommended to work through certain umbrella companies which have led them to use disguised remuneration schemes, often without realising.
Other contractors and locum workers were said to be facing a “take it or leave it” situation when it came to securing work, as they were being forced to use a specific umbrella company.
Greater transparency and regulation needed
The report also highlighted a “general lack of transparency” over fees and deductions, with some umbrella companies “unlawfully deducting employer’s taxes from contractors’ pay” and others withholding holiday pay from contractors who did not know they could claim it.
Some recruitment agencies were also said to be “ignoring the legal requirement” to provide a Key Information Document to all workers. The report concluded that the “unregulated umbrella market is out-of-control” and is one of the “key reasons for tax avoidance schemes operating”.
It stated: “It is clear the current system of voluntary regulation and accreditation does not stop the facilitation of tax avoidance schemes and does not stop malpractice in the supply chain (by both umbrella companies/payroll intermediaries and also recruitment agencies)”.
‘Exploitative practices’ result in ‘wild west’ supply chain
The report calls on the government to intervene and address these issues as part of its promised review into supporting self-employment and examine the best way of “organising, remunerating and taxing” this way of working.
It outlines a number of policy recommendations, which include making it unlawful for agencies to receive financial incentives, withhold holiday pay and force or coerce contractors to opt out of the Conduct of Employment Regulations.
The APPG also suggested making it mandatory for agencies to disclose all fees and costs and explain deductions in documents and on payslips. It also takes the view that contractors working inside IR35 should be granted employment rights and benefits.
Ruth Cadbury, Labour MP and Co-Chair of the Loan Charge APPG said: “It is clear from our inquiry that there is significant non-compliance in the worryingly opaque supply chain, which has been dubbed ‘the wild west’ as a result and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate.
Government must act to avoid Loan Charge ‘scandal’
“If it is serious about clamping down on tax avoidance schemes, the government must legislate to clean up the supply chain and proactively stop schemes as they start, rather than merely trying to take retrospective action after the event. We also call on the government to commence the review they promised to look at all these issues and how best to recognise and structure contracting and freelancing.”
Andy Chamberlain, Director of Policy at self-employment trade body, IPSE, welcomed the inquiry and its “robust stance on the issue”.
He said: “The report is absolutely right to conclude there is an unregulated ‘wild west’ in this area – which is now more of a risk to contractors than ever as the changes to IR35 force more of them to work through umbrellas and intermediaries.
“We wholeheartedly endorse the report’s calls for greater regulation in this area to protect freelancers and contractors from the pitfalls of malpractice and disguised remuneration schemes. Government must quickly introduce tighter regulations on this sector and ensure nothing like the Loan Charge scandal can happen again.”
In response to the APPG’s report, a government spokesperson told Yorkshire Post that this is a “top priority” and it is looking to establish a “single enforcement body for employment rights” in addition to introducing legislation for umbrella companies.
Umbrella expert supports ‘key findings’
Building on these points, Joanne Harris, Technical-Commercial Manager at umbrella company, Parasol, said: “I support many of the key findings in the report; for example, the off-payroll reform has undoubtedly been a driver in the use of umbrella companies, an industry which is yet to be regulated despite promises made by government with the publication of The Good Work Plan in 2018 as well as campaigning from FCSA, REC and others.
“In my opinion, this is the fundamental problem that absolutely must be addressed if the government is serious about stopping contractors getting caught up in tax avoidance schemes.
“[…] However, the report fails to provide balance in some key areas. For example, Preferred Supplier Lists (PSL’s) are discussed only in a negative light and linked inextricably to kickbacks, when that is not always the case.
“Most PSLs are driven by compliance considerations to protect the agency workers from non-compliant umbrella companies and tax avoidance schemes, and the agency from risk under the Criminal Finance Act should they fail to prevent the facilitation of tax evasion.”
Nothing to get excited about. They just want more regulations to fook the umbrella companies now. The establishment has just opened another front against freelance workers, that’s all.
Umbrella companies have been ripping off contractors for year’s. I for1 won’t be using them and all my colleagues feel the same? I would rather be unemployed than get shafted week after week.
I couldnt agree more!! I have been an independent contractor with an international client base for over 30 years and shall never use an umbrella company. From now on I shall only engage with overseas clients or UK clients that offer a “guaranteed outside IR35” contract and T&Cs. I am also considering an expat tax free position in East Asia.
MPs talk a good game don’t they. But nothing really gets done.
IF they wanted to take more tax they could have just legislated everyone is on PAYE.
Just who are they trying to protect? Obviously their own post government careers as consultants
IR35 is the fundamental to all these exploitative practices. The biggest gangsters in town are HMRC. It’s time to reign in their excessive powers. The Treasury is out of control and the big bosses in HMG know they can do what they like at this moment.
Credit to Ruth Cadbury and the genuine APPG for finding and telling the truth here. There’s no need for a Treasury cover up when government can just ignore issues published a week after the new IR35 legislation already came into force.
Most other inquiries are run by government “mates” where they already know the outcome, told to run it past Number 10 to edit before publishing. They then destroy the originals to hide what they changed. If anyone asks for an audit trail (through FOI) they just add the words “we will destroy evidence” into the inquiry scope.
https://www.whatdotheyknow.com/request/morse_review_final_draft_shared
If you have the ability, employ an ex-PM to text the chancellor and things will get sorted. If you are not part of the old boy network – stop whinging about being exploited, because you will be. Fact.
Lets face it, HMRC would have been fully aware of these implications and the likely bad practices of Agencies and Umbrellas. This is just another HMRC ploy to apply retrospective taxation on the contractors/freelancers, in the full knowledge that these bad Agencies would have folded by then
The FCSA is an independent non for profit organisation that has a detailed umbrella code aimed at ensuring compliance standards in the umbrella sector. The audits are carried out in detail every year by independent accountants. Why re-invent the wheel just make them the regulator, they know how to spot non compliance
A rhetorical question I know but why would a regime intent on manipulating every aspect of British life for the benefit of the party ever hand over power to a genuinely independent body?
FCSA has members that break their code everyday
They do nothing about it
They are paid for by umbrellas
You want those guys in charge
Mental
You just described this corrupt government and the people hoodwinked into voting for them.
The implementation of Blanket Ir35 in the nuclear industry means that Most workers in this sector are becoming disillusioned and disncentiveised to work longer hours as it is now a circle of diminishing returns. The more effort the less return and higher taxes to HMRC.
I don’t think HMRC considered that everyone does pay their taxes just in different ways, e.g.corporation tax and VAT and self assessment which they now lose out on as a result of the changes. Ultimately it’s that thay just want to control everything by reducing the number of contractors managing their own affairs.
Working past a basic 37 hours isn’t worth it any more. So work takes longer, projects fall behind schedule and the skills base is reduced by engineers retiring earlier than planned or looking elsewhere for work. E.g. Overseas.
So actually no one wins, everything costs more, the contractor pool works less hours and are less flexible. Time will tell but in the meantime businesses will struggle to get the right cslibre of flexible and skilled expertise when they need it most