Speaking to the House of Lords Economic Affairs Committee, Freelancer and Contractor Services Association (FCSA) Chief Executive Phil Pluck has warned that many freelancers have been unknowingly forced into entering tax avoidance schemes operated by non-compliant umbrella companies since the introduction of IR35 rules in April.
Umbrella companies work by collecting a contractor’s earnings from the firm or recruitment agency that hires them, before deducting tax and National Insurance Contributions (NICs) and paying the contractor their take-home pay. Since IR35 rules came into force, many companies have adopted policies of only engaging with umbrella company contractors in order to avoid the complex IR35 system and umbrella company usage has increased sharply.
Despite many umbrella companies being legitimate and accredited by the FCSA, some are accused of mistreating workers and operating tax avoidance schemes which can have severe consequences for freelancers unwittingly involved in them.
Phil Pluck told the House of Lords that IR35 rules had “forced a lot of people into umbrella employment”. As a result of this, Pluck said, many freelancers who had joined umbrella companies were not fully educated on the umbrella sector and, since April, there has been “very clear evidence it’s driven up tax avoidance”, he claims.
Pluck also stressed that tax avoidance is being driven by non-compliant umbrella companies and insisted that companies that comply with the rules are “net good”. He continued: “We have a series of highly compliant, ethical umbrella companies that operate in a sector that is unregulated and has not been properly policed for decades now. And that has produced an increasing level of non-compliance and unlawful behaviour.”
Responding to concerns surrounding umbrella companies, the government said: “We want to support a dynamic and flexible labour market but it’s important that new models of working do not lead to workers being deprived of employment rights or companies or individuals not paying the right amount of tax. We’ve issued our call for evidence to ensure we have a detailed and up-to-date understanding of the sector and how it is continuing to evolve.”
