Today the Chancellor of the Exchequer announced the Budget, which has been preceded by more leaks than Mélusine after a night on the town.
The Autumn Budget and Spending Review 2021 reaffirmed in paragraph 5.28 the Government’s planned increase in National Insurance contributions by 1.25% effective from April 2022.
We regard the increase in National Insurance contributions as good news for contractors and possibly a death-knell for unscrupulous umbrella companies who pass on ’employment costs’ to contractors. Why?
Any contractor who is ostensibly ’employed’ by an umbrella company or deemed to be inside IR35 will experience a 1.25% pay cut. Typically, umbrella companies treat National Insurance contributions as a cost that is deducted from payment received from the recruiter or end-client rather than passed on to the end-client. That’s why extreme caution should be exercised in relation to umbrella companies. Similarly, the fee-payer (normally a recruiter operating as an employment business) will deduct National Insurance contributions from the chain payment owing to the contractor.
Conversely, a contractor operating outside IR35 will be paid without deduction of tax by virtue of section 44 Income Tax (Earnings and Pensions) Act 2003. It is axiomatic that engaging contractors on an outside IR35 basis is now more attractive and spares end-clients concerns about the Agency Worker Regulations 2010 and other risks. With competent legal advice and expertly drafted contracts, end-clients can manage the perceived risk of the off-payroll legislation and save costs by examining procurement rather than recruitment options. For an engagement to be outside IR35, the contractor must be delivering a specific service and not supplying an individual. If the end-client is not procuring a specific service then IR35 (and off-payroll) unquestionably applies.
We call upon end-clients to reassess their approach to taking reasonable care in relation to status determination statements and consider taking independent and specialist legal advice as required by judgments such as Collis. Taking reasonable care does not mean completing a brief questionnaire supplied by a recruiter or an unqualified person then forcing contractors to purchase unmeritorious tax insurance policies which carry considerable risk in respect of the Managed Service Company legislation.
Following the PGMOL judgment, any tax insurance policy taken out by a contractor in relation to an engagement where the services are described by reference to a job title or role is unlikely to pay out. Even worse, the equitable remedy of subrogation allows an insurer to recover losses from a contractor (if the contractor is at fault, e.g., unreported changes in working practices) where the fee-payer benefits from a tax insurance policy and has made a claim following an HM Revenue & Customs inquiry.
Moreover, a contractor in this position is at risk of tax liability if the contract contains ‘tax indemnity’ clause. That’s why it’s essential for contractors to get independent and specialist legal advice even where the end-client has claimed that the engagement is outside IR35/off-payroll.
Coming soon, why the traditional employment business model has damaged the contracting industry and is simply incompatible with the off-payroll legislation.
Please contact us if you have any questions.