Just weeks ahead of the new IR35 rules coming in, some companies and contractor agencies are seemingly persisting with the use of rules from the original legislation, creating a situation where unlawful deductions could be made from contractor pay.
Under the original (chapter 8) IR35 rules, contractors held the tax liability and were responsible for paying tax, such as National Insurance contributions (NICs) from their own earnings.
Under the new IR35 rules (chapter 10), the liability and responsibility for paying tax now falls with the fee payer. As such, any tax such as NICs must be paid on top of contractor pay, rather than out of it.
However, some companies look to be adopting an outdated and unlawful policy of deducting taxes from the contractor’s rate. If this isn’t addressed prior to the new rules coming in on April 6th, companies could leave themselves at risk of unlawful deductions claims from their contractors, as well as possible HMRC scrutiny.
While this may be an honest mistake on the part of some firms, there is also the scope for non-compliant umbrella companies to intentionally adopt such a policy in order to illegally deduct taxes from a contractor’s gross pay.
If a contractor uses an umbrella scheme, the umbrella company will be the fee-paying party (not the end client) and, as a result, will be liable for taxes. The cost of this is covered by the umbrella company charging the end client an assignment rate for the contractor’s work. This assignment rate will factor in costs such as NICs, the apprenticeship levy, pensions and holiday pay.
If a contractor sees that their umbrella company is charging these costs from their take home pay, rather than an assignment fee, then this is an illegal deduction. All contractors looking to use an umbrella company are advised to find one that is fully compliant with the new rules.
Author: Steven English