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Beware tax avoidance schemes exploiting opportunity from IR35 changes

On the day that IR35 reforms come into effect in the public sector Julia Kermode, chief executive of the Freelancer & Contractor Services Association (FCSA), the UK’s largest independent trade association for umbrella firms and specialist contractor accountants which has been leading a campaign against the legislation said:

“Today’s changes will impose a significant burden on an already over-stretched public sector and will put agencies in the frame making them responsible for carrying out HMRC’s enforcement work for them which is wrong. I would urge umbrellas and agencies to work together to support contractors through the changes and the impact on their pay rates as good communication throughout the supply chain is essential in the face of these changes.

“However, I want to fire a note of caution to agencies and contractors when choosing umbrella firms to partner with – there are a lot of newcomers entering the market with no track record so due diligence is essential to minimise risk for all parties. I would also urge everyone to be wary of tax avoidance schemes that are on the increase – these are highly contrived and place the contractor at significant personal financial risk. They often split pay into two portions, with one taxable element being set very low to minimise tax, and the remainder might be in the form of annuities or other income which providers claim is not taxable. These disguised remuneration schemes are highly contrived and HMRC will pursue users of such schemes for unpaid tax; it is the contractor that will receive the bill and not the provider.

“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 over payments if you are found to be outside IR35 in due course.

“We would not be where we are today if HMRC had properly enforced the original IR35 legislation 17 years ago. It is ill-thought through and the fallout could be disastrous, not least for public sector bodies which will lose out on vital skills as contractors seek roles elsewhere in the private sector.”