Experts issue a warning: tax evasion loophole
Experts issue a warning about an off-payroll tax evasion loophole that exposes people.
Industry experts are raising red flags about a new "Gross Payment Model", allegedly a tax evasion loophole posing as a respectable payment mechanism rising in the umbrella company sector.
It is a scam and could even be fraudulent.
The "model" works when a client or an agency sends money to an umbrella business as payment for services rendered.
The umbrella, however, makes direct payments to the contractor's limited company. When that occurs, the off-payroll law kicks in. Although, because the client never provided the worker with a proper Status Determination Statement (SDS), the client is now responsible for the tax.
The technique takes advantage of the "naivety of clients and agencies," who mistakenly refer to a function as being "Inside IR35". When what they truly mean is that it is "payroll-only."
If the umbrella documents state that the job was classified "Inside IR35," it strengthens their case that they are compelled by legislation to pay the payments with tax deductions.
What is causing this?
The model attempts to exploit a gap in present regulations, which the authorities know. The legislative hood will soon be raised to address the offsets issue, and it is advised that HMRC should be wise to block this channel as soon as possible.
The 'Gross payment model' is, in essence, a scam. Do not approach it. Also, ensure you can notice the signs when it enters the supply chain.
Because an umbrella employs its workers directly rather than through a contractor's limited company, it should never provide a Gross Payment Model, this arrangement would only be used by individuals who received an "Outside IR35" SDS determination from the end client.
When the umbrella provider claims to make the IR35 Status determination rather than the end client, this can expose the whole supply chain to significant risks and potential liabilities up the supply chain.
Our advice to recruiters and clients is to avoid such models at all costs and to ensure you know at all times what solution your chosen umbrella is operating and that it is both credible and legitimate.
In an effort to tackle non-compliance in the umbrella world, the government have recently published a consultation on the regulation of the umbrella industry. The consultation will endeavour to address both employment rights abuses and tax non-compliance, and it is suggested that due diligence checks will become mandatory with a reliance on employment businesses to identify and stop non-compliance. In instances where non-compliance happens, the proposals suggest that it will be the Employment business that faces the penalties and responsibility for unpaid taxes as well as the reputational damage.
The consultation is due to close on 29/08/2023, so watch this space for further information.
In the meantime, when using the services of an Umbrella company, we cannot stress enough how important it is to protect your business and candidates by conducting strong due diligence, which is checked at regular intervals.
For more information on IR35 and how to reduce your risk when using an umbrella company, visit www.gov.uk/guidance
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