Contractors working with public sector clients have been warned not to be taken in by new tax avoidance schemes that have arisen in the wake of the latest change to IR35 rules.
The Freelancer & Contractor Services Association (FCSA) has cautioned agencies and contractors that a number of newcomer umbrella companies are entering the market at the moment with no track record, meaning due diligence is essential to ensure no business risks are created.
Moreover, a number of tax schemes are being offered to contractors in the wake of the April 6th IR35 changes, offering to split pay into two portions, with one taxable element being set very low to minimise tax, while the remainder is provided in the form of annuities or other income, which providers claim is not taxable.
The FCSA described these disguised remuneration schemes as “highly contrived”, noting that they place the contractor at significant personal financial risk, since HM Revenue & Customs will pursue users of these schemes for unpaid tax, with the contractor themselves – rather than the provider – receiving the bill.
Julia Kermode, chief executive of the FCSA, said: “The message to contractors is do not be tempted to enter into anything which promises unusually high take-home pay after tax – it is far better to pay the tax and look to reclaim any overpayments if you are found to be outside IR35 in due course.”
Ms Kermode also criticised the government for its haphazard implementation of IR35 regulations over the last 17 years, saying it is important that umbrellas and agencies communicate properly with contractors to avoid any potential pitfalls and confusion arising from the April 6th changes.