With the new financial year looming, many agency social workers are still agonising over how to manage their tax affairs after 6 April. Incoming changes mean most of them – including those who have until now run their own business via a limited ‘personal services company’ – will now pay tax and National Insurance at source.
The reforms to ‘IR35′ rules effectively determine whether contractors are behaving like employees, and so should pay tax like them; for example because of the level of ‘supervision, direction and control’ they receive. They are causing panic as social workers seek to ensure their status matches the work they actually do in the eyes of the taxman.
Several social workers we interviewed recently about how the changes will affect their lives said agencies were steering them in the direction of working for an umbrella company, which experts say amounts to a tacit admission of ’employed’ status, even though HMRC’s online Employment Status Service (ESS) decision-making tool places them outside of IR35.
The picture has been muddied further by some local authorities apparently taking ‘blanket’ approaches that declare all their agency workers to fall within IR35, conflicting with HMRC’s instruction that public-sector bodies take “reasonable care” when assessing people’s status. We asked Sarah Kay, director of recruitment at the Taylor Davenport agency, and tax expert Carolyn Walsh, what advice they would give to social workers.
Agency workers deemed to be within IR35 must all pay income tax and national insurance contributions but have three options open to them. They can choose to go directly onto agency payrolls (on a reduced hourly rate), work via an umbrella company (via which they should accrue some employment rights, such as holiday pay) or stay responsible for their own limited company but be taxed at source.
Sarah Kay, director of recruitment at the Taylor Davenport agency, said confused social workers had been approaching her firm either because they had received no communication from their existing agency, or because they felt they were only being offered the umbrella option. Kay warned that vested interests were likely to be playing their part. “I am receiving five or six calls a day from umbrella companies offering kickbacks [in exchange for referrals],” she said.
Kay said she advises all social workers to talk to an accountant about their individual situation, and if they are going down the umbrella route to look at firms approved by the Freelancer and Contractor Services Association (FCSA) trade body. She said 75% of social workers on her books had decided such “reputable” umbrella companies were on balance still the best option for them.
Standing your ground
Walsh added that social workers with serious reservations about being placed within IR35 – for example, independent assessors or contractors undertaking project work with complete responsibility for managing their work patterns – should hold their ground and stick with their limited company.
“They can use the test result from HMRC’s ESS tool setting them outside of IR35, and write to their agency to say, ‘Although you are deducting tax at source, I don’t believe these are lawful deductions,'” Walsh said. “Then, they can write to HMRC and if the taxman agrees then they will no longer face deductions and can apply to have them refunded. If on the other hand you go through an umbrella company, you’re gone – that’s the end of it.”
Walsh told Community Care that for many social workers within IR35, the umbrella company model, which often involves people paying employer’s as well as employee’s National Insurance contributions, was unlikely to leave them significantly better off than going directly onto an agency payroll.
“Often with the umbrella route, holiday pay is rolled up within the pay rate; any accrual of holiday pay is therefore paid for by a deduction from workers’ hourly rate,” she said. “Responsibility for paying employer’s NI contributions is paid by deduction from the rate too.
“NI contributions were envisaged by HMRC as being paid by agencies – but instead some have passed them on to workers, via umbrella companies because of a desire to protect their margins,” Walsh added. “However, a few public sector bodies and agencies are paying the employer NI contribution in the form of a surcharge on current pay rates, which addresses this issue.”
Both Walsh and Kay warned that agency workers should steer well clear of any umbrella-type scheme offering a tax rate that seems too good to be true. Several practitioners have recently told us about schemes being advertised online via which earnings are paid partly as a loan (to be written off later), with the contractor taking home 80-90% of gross pay.
Last year Community Care reported on large numbers of social workers being hit with huge retrospective tax bills after being caught up in a tax scam; Walsh said that the loan schemes and other similar processes are already in the taxman’s sights.
“HMRC rules say that anything – they could pay you in cattle – that can be reasonably taken as remuneration for your services, is taxable,” she said. “Anything that sounds too good to be true is probably illegal – HMRC find something and next year, people are getting unwelcome letters.”