Some businesses prefer to use contractors that are employees of umbrella companies (UCs) as that means that they do not need to consider the off-payroll working rules. UCs facilitate the engagement of temporary workers, employing individuals on behalf of clients and employment businesses. The individuals do not provide services to the UC itself but to clients, typically on a short-term basis.
However, the off-payroll problem could be permanently resolved if the total amount of tax and national insurance contributions (NIC) payable by individuals and the engagers of workers was more aligned across all sources of income, and did not vary materially depending on employment status or type of engagement. This could be achieved by replacing NIC on employment income with a hirers’ levy in respect of engagements with both employees and the self-employed.
ICAEW’s Tax Faculty expressed these views in its evidence (ICAEW REP 017/22) submitted in February 2022 to HM Treasury, HMRC and Department for Business, Energy and Industrial Strategy. This was in response to their call for evidence on the umbrella company market launched in November 2021.
The fundamental difficulties underlying the taxation of work need to be properly addressed. It requires an informed debate about how work should be taxed and the extent to which the tax system should distinguish between who is treated as employees or as self-employed.
Compliance would also be enhanced if the taxation of work followed the Tax Faculty’s Ten Tenets for a Better Tax System, which it uses to benchmark the tax system and any changes to it. In particular, the tax system needs to be simple (Tenet 2), certain (Tenet 3) and the tax/NIC easy to collect and calculate (Tenet 4).
Non-compliant UCs compete unfairly with compliant UCs by undercutting them. HMRC should consider ways to encourage engagers and contractors to use compliant UCs, for example, by publishing a list of UCs that it considers compliant.
Companies House and HMRC should work together to monitor directors and shareholders. For example, to check whether tax debts, especially PAYE debts from companies with common directors and/or shareholders, are correct and being paid on time. If not, they should take preventative measures against individuals who are or have been directors of, or significant shareholders in, companies with poor compliance records.
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
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