Empowering the Freelance Economy

IR35 could spark more power in the hands of umbrella companies and less for freelancers

Once IR35 comes around next year, the entrepreneurial spirit of the freelance economy could be driven out of the UK, leaving contractors and freelancers to have little choice than ‘become employees’ to umbrella companies – and pay for the privilege. Who will umbrella and recruitment companies truly serve come April 2021?

Speaking at a Treasury committee hearing this month, chairman Mel Stride took aim at the government’s controversial changes to its off-payroll working rules, FT Adviser has reported.

Mr Stride said: “Leading us all unfortunately to the dreaded IR35, I think we are all agreed this is best abolished as soon as possible.”  

While many freelancers and contractors might be in agreement with Mr Stride, his wishes have not been met. It seems only contractor service providers, rather than the freelancers themselves, have had a seat at the table to discuss the repercussions of the misleading CEST tool and a freelancer’s ability to be employable by medium-to-large company clients once April 2021 comes around.

Some have had a seat at the table, namely, The Freelancer & Contractor Services Association CEO, Phil Pluck, and Chair, Chris James, which have jointly stated that they had a “very positive and constructive meeting with HMRC officials” the week commencing the 12th of October, regarding the recent issues emerging out of off-payroll reforms.

According to an FCSA statement, the HMRC officials have accepted that there is a “clear problem with the legislation as it currently stands”, surrounding the definition of ‘intermediaries’ and the resulting impact on who is and isn’t required to make payroll deductions from payments moving through the supply chain. 

HMRC has accepted that it was never an intention of the reforms to stop a compliant umbrella company from operating as it does today when the new rules come into effect.

The FCSA membership body’s name can be slightly confusing as it does not represent freelancers or contractors, but rather the service providers in the professional employment services sector – umbrella employers, contractor accountants and self-employment/CIS service providers.

“FCSA is a complete misnomer and represents the interests of the Umbrella Industry and Recruitment Agencies, exclusively,” says Nick Woodward, the contractor turned recruitment tech entrepreneur behind ETZ.

“In my opinion, they could inadvertently be seen as an employer cartel,” says Woodward.

While the FCSA may feel like it has greater clarity over where they may stand come April 2021, from a freelancer or contractor’s point of view ‘the conversation’ is still very much geared towards the survival of umbrella companies and those that make their bread and butter out of contractors and freelancers. Not the other way around.

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? Woodward 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 March 2021.

Employment service company reassurances

“HMRC will be working swiftly to address the issues and share our view that primary legislation via the Finance Bill is almost certainly the route to doing so. In the meantime, they fully understand that the sector needs reassurance and, as a result, will be issuing a statement to acknowledge the need to reassure the market and its contractors,” said the FCSA statement.

HMRC has also indicated that they are keen to progress any draft amendments to the legislation in consultation with the FCSA.

FCSA said that they came away with from the meeting with a “very real sense of confidence that the matter will be resolved in advance of the IR35 changes next year”.

According to the federal government’s own figures, the roll-out of the IR35 tax avoidance reforms to the private sector will raise an additional ₤4.1 bn by the 2024-25 tax year. How can this figure be estimated if freelancers and their clients are still stumped about their inside or outside IR35 status?

We all understand that the Chancellor will be attempting to discover approaches to relieve the country’s financial commitment accumulated by the pandemic, but not at the expense of the future employability of freelancers. If hiring companies will feel pressured to hire freelancers- as employees – they may decide simply not to hire. Then what? Increased unemployment?

If freelancers also feel pressured to go through an umbrella company so that they can become employable, regardless of their IR35 status, and pay for the privilege to work (through umbrella companies) and not have the same protections and perks as permanent employees at the client company, then the entrepreneurial spirit of the UK Freelance Economy will be squashed and eventually non-existent.

Food for thought. Amazon’s Jeff Bezos started as a solopreneur.

Seat at the table

Freelancers will undoubtedly be asking, how come the FCSA can get a meeting with the HMRC, but organisations, such as Excluded UK, representing millions of the self-employed workforce cannot?

As the permanent workforce becomes increasingly ‘let go’ by companies following the end of the furlough scheme, and there are millions out of employment, will only then the HMRC and the Chancellor embrace those taxpayers that survived this with no help from them?

Or will the self-employed workforce, the limited company owners, the solopreneurs just have to connect the dots and follow the money to get a better sense of where they stand in the murky fee world of umbrella companies and agency margins?

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