Industry experts are raising red flags about a new "Gross Payment Model", allegedly a tax evasion loophole posing as a respectable payment mechanism rising in the umbrella company sector.
It is a scam and could even be fraudulent.
The "model" works when a client or an agency sends money to an umbrella business as payment for services rendered.
The umbrella, however, makes direct payments to the contractor's limited company. When that occurs, the off-payroll law kicks in. Although, because the client never provided the worker with a proper Status Determination Statement (SDS), the client is now responsible for the tax.
The technique takes advantage of the "naivety of clients and agencies," who mistakenly refer to a function as being "Inside IR35". When what they truly mean is that it is "payroll-only."
If the umbrella documents state that the job was classified "Inside IR35," it strengthens their case that they are compelled by legislation to pay the payments with tax deductions.
Others are joining in the unanimous call for caution. "Anyone hearing the phrase 'Gross Payment Model' uttered by an umbrella should exercise extreme caution, or businesses and agencies may face crippling tax bills as well as criminal investigations for fraud," warns Dave Chaplin, CEO of IR35 compliance firm IR35 Shield.
"Agencies and clients must either process and pay the taxes themselves or request proof from umbrellas that all payments are made correctly and processed as employment income," adds Chaplin.
What is causing this?
The model attempts to exploit a gap in present regulations, which the authorities know. The legislative hood will soon be raised to address the offsets issue, and it is advised that HMRC should be wise to block this channel as soon as possible.
The 'Gross payment model' is, in essence, a scam. Do not approach it. Also, ensure you can notice the signs when it enters the supply chain.
Because an umbrella employs its workers directly rather than through a contractor's limited company, it should never provide a Gross Payment Model. This arrangement would only be used by individuals who received an "Outside IR35" SDS determination from the client.
When the umbrella provider decides, HMRC can shift significant risks and potential liabilities up the supply chain.
Such agreements are unethical, in our opinion, and our advice to recruiters and clients is to avoid them.
For more information on how to reduce your risk of using an umbrella company, visit www.gov.uk/guidance
IR35 Brouchre: https://www.simplicityinbusiness.co.uk/are-you-ready-for-ir35/
