Experts warn of Off-payroll tax avoidance loophole that leaves people exposed
Industry experts are sounding warning bells about a new “Gross Payment Model” emerging in the umbrella company sector, which they claim is a tax avoidance loophole, masquerading as a credible payment method.
It’s essentially a “scam, and possibly even fraudulent,” says one source.
The “model” operates when monies are paid by a client or agency to an umbrella company, in good faith that they will be processed as employment, according to a source working in the contractor services sector.
However, instead, the umbrella pays the contractor’s limited company directly. “When that happens, the off-payroll legislation comes into play, but because the worker was never given a valid Status Determination Statement (SDS) by the client, the client becomes liable for the tax,” says the source.
The scheme also leverages the “naivety of clients and agencies”, says the source, who loosely use the phrase “Inside IR35” when describing a role, when what is really meant is that the engagement is “payroll-only”.
“If the umbrella records that the role was declared “Inside IR35”, then this reinforces their argument that they are required, by statute, to pay the monies with tax deductions,” the source says.
Others are sharing their united call for warning. “Anyone hearing the phrase ‘Gross Payment Model’ uttered by an umbrella should take extreme care, otherwise firms and agencies could face crippling tax bills along with being embroiled in criminal investigations for fraud,” says Dave Chaplin, CEO of IR35 compliance firm IR35 Shield.
“Agencies and clients either need to process and pay the taxes themselves or ask umbrellas for proof that all payments are being made correctly and processed as employment income,” says Chaplin.
Why is this happening?
Chaplin explains, “The model seeks to leverage a loophole in the current legislation, and the authorities are aware of it. The legislative bonnet is shortly being lifted to fix the offsets issue, and I am proposing to HMRC that it would be prudent to close off this avenue promptly.
“The ‘Gross payment model’ is essentially a scam. Nothing else. Don’t go near it. And make sure you can detect it when it enters the supply chain.”
“An umbrella should never be offering a Gross Payment Model”
Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance, says an umbrella company should never be offering a ‘Gross Payment Model’ because an umbrella employs its worker directly and not through a contractor’s limited company.
“Only those provided with an “Outside IR35” SDS determination provided by the client would be using this arrangement,” says Temple.
Where the umbrella provider is making the determination, this raises significant risks and potential liabilities that HMRC is then able to pass up the supply chain, he says.
“We consider such arrangements unethical and my message to recruiters and clients is to stay well clear of such offerings,” says Temple.