IR35 to open floodgates for umbrella companies
Large, multinational businesses are all imposing blanket bans on working directly with limited companies post-IR35. Instead, by using contracts with umbrella companies, they will become instantly “IR35-compliant”. They also avoid additional admin work and insulate themselves against any potential financial liability to HMRC.
The change to contractors’ tax is handy for HMRC, but it’s a situation with unintended consequences for accountants and so-called umbrella payroll companies. As a direct result, many thousands of freelancers and contractors will be quickly added to the books of umbrella companies.
Unprepared umbrella companies, that would otherwise be happy for the extra volume, may find their operational workforce swamped, processing every new worker following more rigorous checks than ever before.
Umbrella companies are eager to place more workers into multinationals. But, will they find themselves in danger of becoming flooded with excessive admin tasks such as manually keying and re-keying data to cope with this surge of new business? The increased potential for human error could lead to an HMRC investigation, which involves a high cost. Being investigated can result in a penalty equal to the amount of unpaid tax, on top of the tax itself.
The penalty will be even higher if HMRC perceives it has been deliberately misled, so it is an experience well worth avoiding. Interest is also payable on unpaid tax which will dramatically increase the penalty depending on how long the problem goes ignored. This is of course assuming HMRC decides someone is innocent and any unpaid tax is a mistake. If tax avoidance is decided to be deliberate and over £25,000, the unlucky victim even gets a place in HMRC’s digital rogues gallery.
Some umbrella companies will bring in new staff to deal with the flood of new workers to the books. But hiring such an army, even under IR35, requires a war chest many businesses don’t have — even if they can find the staff. Today’s inexperienced trainees have grown up with modern, intuitive tools and so are more prone than existing accounting staff to making the kind of errors HMRC would be very interested in.
More bodies will not keep the danger at bay, real efficiencies can only be found in upgrading and automating the current IT infrastructure. Modern processes purpose-built for the IR35 era ensure overwhelmed staff can handle the volume of contracting multinationals, altering how they work.
Technology automating lengthy processes such as on-boarding, payroll and account management will allow umbrella companies to scale without taking on the financial burden and risks involved with additional manual tasks. There will be an up-front cost associated with this, but it is outweighed by the long-term benefits such an upgrade would bring.
So, are human staff redundant now? Eliminating repetitive tasks will mean umbrella company employees are freed from manual data entry. Instead of maintaining current work, employees will be empowered to focus on higher-skill responsibilities which add greater value to the business such as generating new business and building volume. This prioritisation of tasks will become far more integral to the success of umbrella companies with the influx of new workers on the books and more businesses turning to the umbrella model to support their need for contractors and freelancers.
Automated accountancy tools deliver consistent value which exceeds their one-off purchase and the residual costs required to hire and pay staff performing manual tasks.
Umbrella companies can responsibly manage the increase in workers on their books because of the off-payroll practices taking place at multinationals. What will make this a reality is rolling processes into one application with all the key services needed to service contractors: from CRM, to payroll and tax management.
It would be easy for the nuances of IR35, such as tricky assessments, to make an accountant or umbrella company panic.
Umbrella companies and accountants could understandably rush into decisions, such as going on a sudden hiring spree to support segregated IT systems already falling apart at the seams. However, these options are not sustainable.
IR35 is a huge challenge which requires significant change to survive. Why not use this as a chance to do something bigger? Ditching old-fashioned, manual work and embracing the future of automation will free humans to use their full talents and deliver rewards far greater than just persevering with IR35.
Automation transforms IR35 into an opportunity umbrella companies should capitalise on as much as they can. This will allow umbrella companies to use the surge in volume caused by IR35 to drive their success, rather than being carried away in the deluge. Will the government and its advisers be as successful?