The Loan Charge APPG has published what it deems “a powerful report” on their inquiry into ‘How Contracting Should Work’. The APPG has reported that it has exposed significant non-compliance and malpractice in the supply chain by many umbrella companies and recruitment agencies.
That is not to say all agencies and umbrella companies are bad apples. However, those that have gone to the dark side have driven the operation and misselling of tax avoidance schemes to such a point that MPs, such as Ruth Cadbury MP, Loan Charge APPG Co-Chair, MP for Brentford and Isleworth (Labour), are dubbing the contractor supply chain the ‘Wild West’.
What is the Loan Charge APPG Inquiry?
The inquiry, which began in December, has examined how professional contract and freelance working should operate, be remunerated and taxed fairly and appropriately and also to prevent tax avoidance schemes being promoted or actually existing at all.
The inquiry received written submissions and included an oral evidence session on Tuesday 15th December 2020. This Inquiry is an important part of addressing the factors that led to the situation people are in, facing the Loan Charge (and other related HMRC action, for use of ‘disguised remuneration’ schemes).
The Loan Charge APPG was set up in early 2019 and the Loan Charge Inquiry, which was published in April 2019, examined how people came to use the arrangements now subject to the Loan Charge, as well as how the Loan Charge was introduced. This Inquiry goes a stage further, into examining in detail the reality of professional contracting and freelance working, the different ways of organising and structuring such work and the issues that have led to the use of schemes now subject to the Loan Charge.
What did the ‘How Contracting Should Work’ Inquiry reveal?
- Recruitment agencies demanding ‘kickbacks’ or incentives from umbrella companies for being added to a preferred supplier list/recommended to clients, even sometimes including fitted kitchens and holidays for recruitment agency directors. This then incentivises non-compliant providers (who because of non-compliance have higher margins) to offer large bonuses to gain access to potential clients.
- In some cases, contract, freelance and locum workers are being pushed to use a specific umbrella company and, in other cases, workers are given no choice as to which umbrella company to use, so the situation facing the worker is effectively ‘take it or leave it’. This is a particular problem when the only source of work in a sector is via recruitment agencies. This is the case for many workers including some lower paid contract and locum workers.
- In some instances, public sector approved agencies and even public sector organisations themselves have recommended people use umbrella companies that have put them into ‘disguised remuneration’ schemes.
- A general lack of transparency over deduction, fees and contractor pay/payments and some recruitment agencies ignoring the legal requirement to provide all workers with a Key Information Document (KID).
- Some umbrella companies appear to be unlawfully deducting employer’s taxes from contractors’ pay.
- The covert withholding of holiday pay by some umbrella companies, because the contractor did not know it was claimable. In some cases, this has also involved umbrella companies refusing to pay Covid furlough unless contractors waived their right to holiday pay.
A fundamental conclusion of the ‘How Contracting Should Work’ Inquiry is that the “unregulated umbrella market is out-of-control, all too often exploiting contractors (often without them realising it) and is also a key reason for tax avoidance schemes operating and being so readily and openly advertised.”
“It is clear that 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),” the APPG said in a statement.
The report calls on the Government to announce plans to intervene and introduce statutory regulation for payroll intermediaries and also to make the following changes to stamp out malpractice:
- To strengthen, clarify and enforce the existing regulation that makes it unlawful for an employment business to offer a position that is conditional on using a specified umbrella company or payment intermediary, to stop workers being pushed or encouraged to opt-out of the Conduct of Employment Agencies and Employment Business Regulation 2003.
- To make it unlawful for agencies to get financial incentives or ‘kickbacks’ from umbrella companies, via timesheet commissions, introductions, or otherwise.
- To make it unlawful for a contractor to be forced or coerced to opt-out of the Conduct of Employment Regulations (unless they are working on an “outside IR35” basis via a limited company (PSC)).
- To make it a statutory obligation to quote only PAYE contract rates for temporary worker engagements that are not “outside IR35”.
- To outlaw the withholding of holiday pay and at the same time introducing the recommendation from the Taylor Review, allowing contractors to receive, by default, their holiday pay “rolled up”.
- To introduce mandatory transparency, so that all payroll intermediaries and agencies must disclose all fees and costs and explain all deductions, both in documentation and on payslips, as well as ensuring recruitment agencies provide Key Information Documents to all workers.
- To clarify the situation regarding employer’s tax and National Insurance contributions.
Who do you go to if you think you have been duped?
The Loan Charge APPG is also calling on all freelance and contract workers and advisers, who have experience of and evidence showing these practices, to report it to their own MP. This evidence should also be presented to the Government and to appropriate Parliamentary Committees, as well as reporting it to the representative bodies, if it involves any of their members.
The Inquiry has also exposed how HMRC have data that they could use to clamp down on suspected tax avoidance schemes, but do not currently use it. The report calls on HMRC to properly link and reconcile the quarterly data of employment intermediaries with the Real Time Information (RTI) submissions in order to quickly detect tax avoidance schemes, then take action to shut them down.
Flawed IR35 legislation
Baroness Susan Kramer, Vice-Chair of the Loan Charge APPG (Liberal Democrat), said, “The Loan Charge APPG report shows the confusion as to how professional contract and freelance workers are supposed to operate. This has been driven to a great extent by the deeply flawed ‘IR35’ legislation and the associated off-payroll working rules.”
Kramer said that the forthcoming Finance Bill should scrap or at least amend the off-payroll rules to tackle bad practice in the supply chain and to ensure that anyone who is taxed as an employee, receives genuine employee rights and benefits.
“We also call on the Government to announce the review into self-employment that they promised, so that rather than constantly penalising contract and freelance workers, we move to a proper system of recognition and structuring of this important way of working, which is increasingly commonplace and important to the economy.”Baroness Susan Kramer, Vice-Chair of the Loan Charge APPG (Liberal Democrat)
The Loan Charge APPG is calling on the Government to amend the off-payroll working rules, address these during the passage of this year’s Finance Bill and for the Treasury and HMRC to consider how best to stamp out the abusive practices outlined in this report.
Part of this should be legislating that “inside IR35” workers should get full rights under all legislation dealing with agency workers, with a clear and transparent right to holiday and sick pay.
The Loan Charge APPG report concludes by calling on the Government to follow-up the Taylor Review and to examine the best possible ways to organise and structure contracting and freelancing.
The report and its recommendations will be sent to Treasury Ministers, and the APPG is urging the Government to act in the forthcoming Finance Bill, in order to deal with these many issues, including amending the off-payroll rules to stop non-compliant practices by payroll intermediaries.
Who are the Officers of the Loan Charge APPG?
- Ruth Cadbury MP, Co-Chair, MP for Brentford and Isleworth (Labour)
- Sir Mike Penning MP, Co-Chair, MP for Hemel Hempstead (Conservative)
- Rt Hon. Sir Ed Davey MP, Co-Chair, MP for Kingston and Surbiton (Liberal Democrat)
- Hon. Baroness Kramer, Vice-Chair (Liberal Democrat)
- Rt Hon Sammy Wilson MP, Vice-Chair, MP for East Antrim (DUP)
- Owen Thompson MP, Vice-Chair, MP for Midlothian (SNP)
The report can be accessed here.