‘Thousands’ of IR35-hit contractors face Loan Charge crisis rerun
Issuing this alert to peers, advisers suggested that the new IR35 will make alternatives to the limited company structure appealing, but not necessarily transparent or compliant.
This push towards schemes which often pose as umbrella companies happened when IR35 first took effect, said the Association of Independent Professionals and the Self-Employed.
'Schemes flourished from a laid trap'
“The reason these schemes flourished 20 years ago is somewhat attached to the IR35 rules,” began IPSE’s deputy director of policy Andrew Chamberlain.
“[IR35] set a trap to a certain group of taxpayers who felt that it was going to stop them from running their business. And [so unfortunately] they ran into the arms of these promoters”.
But the association cautioned of an even more recent precedent, involving rules modelled on the very framework set to be introduced in just 15 weeks’ time.
“In 2017, the rules around IR35 in the public sector changed and that meant there was an increased usage of umbrella companies. [So] people who were contracting and being paid by their own limited company…[had] to go into umbrella companies -- many of them perfectly compliant”.
“But some of [the umbrellas] were these loan scheme-type arrangements,” it said. “So that could have possibly prompted a spike in the use of [Disguised Remuneration].
“And what worries us is that in April next year, when the private sector rules [to reform IR35] come in, we’ll have the same problem.”
'Thousands will be pushed'
In line with the first evidence session hosted by the Finance Bill Sub-Committee, which heard DR scheme usage is increasing, the peers were told that the worse may be yet to come.
“We know these schemes are still out there,” IPSE said. “Thousands of people are going to be pushed into umbrella companies [which are] not well regulated, and some [of these thousands] will unfortunately fall into the hands of scheme promoters. And that’s a big concern for us.”
Asked specifically by Lord Bridges if the association believes that private sector IR35 reform may contribute to an increase in DR schemes, Mr Chamberlain confirmed:
“Yes, I think it will. Because certainly it’s going to increase people in umbrella companies and [although] most of them are going to be compliant…I do feel that in some instances, [that they won’t be].
“[Workers who leave PSCs due to April’s IR35 reform] are going to end up saying, ‘I’ve got to choose an umbrella. This one here -- or this one over here is telling me I can take home 85% of my pay -- [so] I’ll go with that one; brilliant.’ And we’re back into this problem again.”
'Sold their soul to the devil'
Also giving evidence to the peers, Keith Gordon QC suggested that history looking destined to repeat itself -- by business soloists once again having to shed their structure -- was not accidental.
“There is a culture within the Revenue…to get as much money as possible. I don’t think there is much sympathy [from HMRC] for anyone who considers themselves to be an entrepreneur.”
Expanding his assessment, the barrister continued: “I think there is a feeling within certain parts of the Revenue that anyone who’s not working as an employee, or possibly even in the public sector, has somehow sold their soul to the devil. And deserves what they get. It’s a slightly colourful way of describing it but that’s certainly an impression that one gets.”
'Intermediaries legislation is the possible cause'
And the QC at Temple Tax Chambers confirmed IPSE’s ‘big concern’ as being well-founded.
“IR35 is possible the original cause of the entire problem,” deduced Mr Gordon, adding:
“And [so] I think that whenever parliament enacts legislation of any anti-avoidance-type they just have to consider what are the likely, and possibly less likely consequences.
“Because if you’re driving taxpayers into a risk of an [HMRC] investigation and you’re a one-person business, you can defend yourself -- but that’s going to take three or four months of your life, full-time. Or a year part-time. You’d rather just be earning some money for your business. There are huge problems underlying the entire tax system and this is just the tip of the iceberg.”
'HMRC will deem it all disguised'
Ominously, pitting workers on a collision course with the Revenue is the indirect result of quite insistent sales teams operating today, who claim that their schemes are:
“‘Perfectly legal’ – [specifically denying they’re a] a loan scheme,’” submitted IPSE’s Mr Chamberlain. “Or [they claim] ‘this one’s [fine because it is] using a share scheme.’ Or something else weird and wonderful.
He warned: “[But ] I believe HMRC will deem it all to be Disguised Remuneration. And I think people will end up in hot water. The IR35 rules are coming in too fast, and we should be regulating umbrellas first.”