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FCSA clarifies their position on Umbrella companies


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24 November 2017



Freelancer & Contractor Services Association clarifies the position of umbrellas undertaking their own IR35 assessment – and it’s a huge win for justice.

The Independent Health Professionals’ Association (IHPA) was delighted to receive confirmation that the Freelancer & Contractor Services Association (FCSA) recognises the right of the ‘Fee Payer’ (e.g. the umbrella or agency where it pays the worker) to disagree with the Public Sector Client’s determination and undertake its own IR35 assessment with ’Reasonable Care’ in line with the law. .

Responding to public questions from the Independent Health Professionals Association (IHPA) on whether such an umbrella would be considered ‘FCSA Compliant’ FCSA CEO Julia Kermode confirmed the FCSA’s view, supported by legal advice from Earnest & Young, that the ‘Fee Payer’ could quite legitimately disagree with the public sector client where it believes the determination to be incorrect.  She has confirmed that such an umbrella could be considered ‘compliant’ by the FCSA – as it would be acting lawfully, although it may shoulder legal liability for its decision. Most such providers mitigate this risk through an insurance product that insulates them from this risk. It will be the “fee-payer”, acting on the advice of the client, who decides whether or not to account for tax on an employment basis, rather than the contractor’s intermediary.

While the fee-payer is the person who has to operate PAYE and so must take the decision whether or not a contractor falls within the new regime, they are expected to take that decision on the basis of information supplied by the client (who of course may be the fee-payer). Section 61T ITEPA (Chapter 10 of Part 2 of ITEPA) requires the client to inform the person with whom they contract whether they have concluded that the worker is similar to an employee (as defined in the legislation) or dissimilar s 61T (1). That person can then ask the client for an explanation, which must be given to them within 31 days. If the client fails to do this, they are treated as the fee-payer. If the client contracts directly with a PSC, this means they are required to tell the PSC why they have decided they should or should not deduct PAYE. The worker has to provide the fee-payer with details of his relationship to the intermediary, so that the fee-payer can decide whether the worker falls within the requirements relating to companies, partnerships or individuals: s 61U.

Who is liable?

This depends upon whether the Public Sector Client (eg NHS trust) has honoured its statutory obligations. Particularly whether it has reached an individual determination, and whether Due Care has been taken in reaching it.  Where it does the above, the ‘Fee Payer’ (in this case the umbrella), would be liable for any unpaid taxes should it get the determination wrong (insurance is available to mitigate this risk).

What about where the public sector client behaves unlawfully, eg blanket assessments?

In this case the public sector client assumes the liability BUT the Fee Payer decides whether to operate IR35 or not.

Where the tax liability has passed to the public sector client under the new Chapter 10, for example, due to the client/NHS trust having failed in its statutory duty to undertake a lawful individual IR35 assessment with reasonable care i.e. blanketing, the umbrella may still make the determination; any tax liabilities will fall on the public sector client.

So, if the public sector body were acting lawfully, as FCSA CEO Julia Kermode correctly highlights above, the umbrella would be taking a risk in reaching its own determination. This is stark reminder why such umbrellas are often well advised to have insurance models in place to mitigate the tax risk here – which most do.

That said, where the public sector body is acting unlawfully, as it seems a truly staggering number of public sector bodies are, then the public sector client has made itself liable by acting in this way.

Misleading Rhetoric

This discussion highlights a recurring theme of misleading HMRC rhetoric surrounding who is liable under the public sector off payroll reforms, which given its patently counterfactual claims that there is no blanketing likely surprise nobody.

HMRC has been routinely attempting to give the false impression that there is an obligation upon other parties to respect the public sector client’s determination. A decision which IHPA’s leaked evidence and multiple industry sources reveal is usually unlawful in practice.

Who is the Fee Payer (The technical bit!):

Put simply, this means whoever pays the worker’s company, or where the payment chain moves offshore the last UK resident company/individual – in this example it refers to an umbrella company.

Or in legal speak (feel free to skip):

The “fee-payer”, who is the lowest UK-resident person, not controlled by the worker or their associates, and not being a company in which the worker or their associates has a material interest, who forms part of a chain of persons along which the consideration for the worker’s services is passed from the public authority client to the intermediary. Where the public authority engages the intermediary directly, they will be the fee-payer as well as the client.

These requirements are set out in new ITEPA Chapter 10 s 61N.

Does the Sector Client Have to Reach a Determination?

Whilst there is a statutory obligation upon the client to reach an individual determination with reasonable care, most are failing to do this, and are instead adopting blanket approaches as they lack the required legal background to comply, and are not competent to exercise the required reasonable care. Furthermore, most would struggle with the administrative burden of compliance with the legislation, and huge pressure from external bodies to blanket by the collusion of numerous other bodies. They’re also required to clarify enquiries into how their determination has been reached by the worker within 31 days. The public sector client’s determination does NOT need to be accepted by the fee payer. The fee payer needs to consider it, but may overturn it.

This demonstrates that the legislation is unworkable.

Who is the Public Sector Body Obliged to Tell Under the Legislation?

There is no statutory obligation on the client to tell anybodysave the worker themselves. Not the agency, nor the umbrella.  There is equally no obligation upon anyone to abide by these determinations – most of which are unlawful blankets, and those which are not are usually being reached by those without the required technical knowledge to undertake an assessment.

The Fee Payer is responsible for whether or not to operate IR35. This will be the public sector body (eg NHS trust) only where they pay the worker directly. We must remonstrate that this is NOT the form of ‘Direct Engagement’ that we see in the NHS at present. 

So would an umbrella which undertakes its own IR35 assessment with due care and respects the law be compliant? FCSA CEO Julia Kermode seems to think it would be so, which agrees with numerous legal opinions seen by IHPA.

So does HMRC acknowledge this is the case?

Yes actually. They might not like it, they might try to misrepresent things in their guidance and rhetoric, but take a good look at Pg 22 of the Private sector IR35 consultationand look at what change HMRC wants enacted:

6.11, question 8:

 "Q8. What action should be taken in the case where the fee-payer hasn’t acted upon the client’s conclusion that the worker would have been regarded as an employee for income tax and NICs purposes if engaged directly? Should an obligation be placed upon the fee-payer to adopt the client’s conclusion and there be sanctions for failing to do so?"

So does HMRC know there is no obligation to respect the public sector client’s decision – yes it absolutely does, and  they hate it.

Is that surprising? Hardly, given the overwhelming evidence of HMRC malfeasance –

  • misleading advice
  • tools that don’t align with the case law
  • Using arguments which have publicly failed in court on multiple occasions as a ruse to maintain unlawful blankets.

Buried away elsewhere in HMRC’s guidance is this other telling phrase:

“8. Where a public authority, agency, or third party, “the fee payer” makes a payment to a worker’s intermediary on or after 6 April 2017, IT DECIDES IF THE RULES APPLY, and then deducts tax and primary NICs from the payment it makes, and pays employer NICs and is included for calculating the Apprenticeship Levy. The VAT exclusive amounts must be accounted for through Real Time Information (RTI), in in the same way as for an employee. The change does not affect employment rights available to the worker.”


“31. The off-payroll working in the public sector legislation in Chapter 10 imposes the same employment status test. THE PERSON PAYING THE INTERMEDIARY MUST LOOK AT THE ARRANGEMENTS UNDER WHICH THE WORKER PROVIDES THEIR SERVICES TO THE CLIENT. If applying the employment status tests to that engagement shows they would have been an employee of the client but for the existence of the intermediary, then the engagement is caught by the new rules.”


Can the frameworks sanction you for disagreeing?

The stories of frameworks being complicit in unlawful conspiracies to blanket workers are abound.  Indeed, certain parts of such claims appear to be corroborated by clauses contained in their framework agreements and notable in some of their payslip audit requirements.

IHPA has seen contractual clauses which attempt to bind people to override the law in respecting the public body decision - whether it was reached lawfully or not.  Requests for clarification on such points are met with deafening silence. The section of the law on whether the ‘Fee Payer’ should operate IR35 refers to the facts of the engagement, not the public sector body’s determination.

If the Fee Payer knows a public sector body decision has not been reached lawfully, it is not unreasonable for it to make a correct decision. If the decision was reached lawfully, but the fee payer believes it is incorrect, the Fee Payer is absolutely entitled to respect the result of its own determination, provided it is reached lawfully and in good faith.

Can the frameworks bind you to do otherwise? Operating the off payroll rules when you shouldn’t is unlawful; it would appear to IHPA that a framework contract clause which attempts to compel an individual to commit an act which would be unlawful is probably unenforceable as a matter of contract law.

One cannot very well sue one’s hitman for not carrying through on a contract killing.

The above notwithstanding we urge all parties to take their own legal advice on this matter. Which we expect will confirm this position.

Disclaimer – This is not legal advice. We urge all parties to seek independent legal tax advice from regulated legal tax practitioners.