Gig workers and multi-sector contractors, popularly linked with cab-hailing, delivery platforms and staffing agencies, will see big changes in how they are classified on or off-payroll and how they are taxed after April. Many will feel pressured to sign up to an umbrella company for employment security – costing them potentially hundreds of pounds in monthly fees and higher taxes.
As of 6 April, IR35 tax or off-payroll reform will mean medium and large businesses in the private sector will become responsible for determining the IR35 status of contractors they engage. As part of the changes, the liability will be transferred from the contractor to the fee-paying party in the supply chain, which is either the end client or the recruitment agency placing the worker.
“IR35 reform is rapidly approaching and businesses – whether end clients or recruitment agencies – yet to inform contractors of their plans should do so right away,” said Qdos CEO, Seb Maley. “Leaving contractors in the dark over IR35 could prove to be a big mistake, particularly in the current climate,” he said.
Qdos has reported on the grey lines between contractors and gig economy workers and then the even more vague ability to assess either on an individual basis when it comes to IR35 and HMRC’s CEST tool.
Platforms that drive the gig and freelancer economy, such as Just Eat, are moving away from ‘gig economy’ workers in the UK, instead offering driver benefits including hourly wages, sick pay and pension contributions, FT’s startup news site, Sifted, has reported.
“The company, which merged last year with Netherlands-based rival Takeaway.com, in effect threw down the gauntlet to rivals such as Uber, Deliveroo and Glovo who are still using workers with no employment rights and benefits.
But Just Eat’s announcement is merely the latest development in a shift across Europe — encouraged by growing regulation and also a growing discourse against gig workers — that has seen others like courier federation CoopCycle look for a new employment model,” said the report.
To keep HMRC off their backs or apathetic to the plight of their talent pool in less than three month’s time, hiring companies could unwittingly be pushing gig workers and contractors to join umbrella companies unnecessarily. Freelance workers that are trading as limited companies may join umbrella companies because they believe that they will be more ’employable’ to large existing or prospective employers and get sick and holiday pay – which they are effectively paying for with their higher PAYE tax rate, plus umbrella fees. But they should only do so, if they are crystal clear on their employment status with a client. If they rush the process they could be buying into something that will not only put them further out of pocket in umbrella transaction fees, but be foregoing like for like benefits that hiring companies employees enjoy. Now is the time to speak to the HR departments of hiring companies you work for, or the recruitment or staffing agencies that act on behalf of the companies.
Freelancers that have registered as sole traders must be mindful that the Treasury could deem them as hidden employees. For sole traders operating through an agency, specific legislation applies, known as Agency Legislation or Onshore Employment Intermediaries Legislation.
“There are many ways in which a sole trader can be hired by a client,” according to IR35 specialist and insurer Qdos. ”The client organisation will be responsible for paying the additional taxes, interest and possibly penalties should a sole trader be considered to be an employee. Whilst the sole trader does not carry any liability, they would of course suffer a deduction on their future earnings, as the likelihood is that they would have to be placed onto the payroll of the end client.”
With Deliveroo’s expansion plans to include 100 new UK towns and cities in 2021 and a multi-million-pound investment round valuing the business at over $7bn under its belt, will the platform eventually – due to IR35 rules -turn to an agency PAYE (and fork out for recruitment fees) or an umbrella PAYE self-employed limited company model so they can forego recruitment agency fees?
For freelancers, the genuine fear is that umbrella companies and recruitment agencies will lose their true sense of purpose by serving themselves and clients and doing little to serve the talent that actually feeds their raison d’être: freelancers and short-term contractors. Many cynics will say, well that’s their business model, get over it.
But is it the only way? Nick Woodward, the contractor turned recruitment tech entrepreneur behind ETZ, doesn’t seem to think so. He believes the main problem for all parties is the “complex and opaque nature of the supply chain”. He suggests the industry would work much better if the following happened:
- Umbrella companies invoiced directly to the end hiring company, and the Employer costs i.e. NI, AL, etc. were passed on directly to the end hirer.
- Recruitment agencies billed their margin directly to the end hiring company, end hiring companies could also opt to self-bill the recruitment agencies their margin.
- A universal timesheet and payment platform that is funded equitably amongst the three stakeholders by a service fee of between 1% and 2% of the transaction, deducted on payment. The platform would eliminate the need for recruiters to use expensive and archaic financial products, such as invoice discounting.
Woodward says he is working on a solution with ETZ.One, which is an FCA regulated e-money institution (EMI) that is trialling this platform and strategy with a number of industry players. A target roll-out for a commercial platform is hoped to be set in place for IR35 in the first half of 2021.