Contractual relationships vital to ensure limited company exemption from AWR

Contractual relationships vital to ensure limited company exemption from AWR

Limited companies are once again in favour as a result of Umbrella arrangements being caught by the new Agency Workers Regulations.  However Barry Roback, Director of Privilege Accounts, the specialist accountants for contractors and freelance professionals, warns that the limited company route is only viable if all the tax rules are obeyed and workers are genuinely in business on their own account. 

Says Roback: “Attempts to exclude all limited company contractors from AWR were thwarted by HMRC who were afraid that anyone who has a shareholding or holds office in a limited company could make it easier for unscrupulous parties to set up business models to circumvent the protection of individuals under the Directive. However, with the promise of a less heavy handed approach to genuinely IR35 friendly contractual arrangements by HMRC, limited companies could greatly benefit freelancers because they give the tax and operational advantages of being in business on their own account and eliminate agency and end user client liability under AWR.”

However he advises that while there is no doubt that the AWR legislation effectively excludes limited company freelancers who are genuinely working on their account, it is necessary to issue a word of warning. If HMRC senses that limited companies are being used as a ‘wriggle factor’ in avoiding the AWR, it will crack down promptly, making life difficult for genuine IR35 exempt contractors.   Therefore it is vital for freelancers, recruitment businesses and end-users to start thinking in a coordinated way ‘outside the box’ in order to develop strategies that are both IR35 compliant and AWR exempt.

According to Barry Roback, as things stand at the moment, the three sides of the typical freelance triangle tend to fend for themselves and do not accept any significant level of responsibility for each other’s actions. “Employers largely rely on recruitment businesses to check out a freelancer’s references and suitability for the job and both recruitment business and end user rely on freelancers to verify their IR35/limited company status. The freelancers depend on the end-users to pay their agency the agreed amount on time and on the agency to pay them as agreed.”

He highlights that the problem with this inter dependent chain is that the links are often weak and not particularly reliable. “As the legislative noose tightens around recruitment businesses in particular, it is no longer wise (or indeed legitimate) for the chain to remain so weak.  Agencies can no longer detach themselves from the sources of their income- i.e. end-users and freelancers. Under the money-laundering legislation, for example, they have to be sure that all freelancers are hired in a bona fide role, with a rate of pay that reflects their qualifications and experience.”

Roback emphasises that end-users need to know that the freelancers they hire are IR35 compliant and that their professional qualifications have been checked out. They also need reassurance that the agency will pay the freelancer on time and with the correct deductions (where appropriate) in order to avoid the need to sort out time-consuming problems.

Freelancers - particularly those new to this method of working - want easy access to the most tax effective regimes so as to maximise their income and minimise their problems with HMRC. They also need to know exactly how much they should be paid and reassurance that the correct paper work is completed, as well as being paid on time with the minimum of hassle.

“Over many years as specialist accountants to the freelance market” concludes Roback,” we have found that our role as a link between end-user, freelancer and agency has become an increasingly important part of our business. Obviously our primary duty is to our freelancer clients, but we can fulfil our role most effectively where we also have an on-going relationship with recruitment businesses (and often with end-users) so that we understand their operating methods and can carry out due diligence where necessary to ensure that everything is in fully compliant.

“Ultimately recruitment businesses, freelancers and end-users are each responsible for adhering to the growing mass of legislation that continually pours out of Whitehall. However our experience tells us that where the contractual arrangements are genuinely outside of IR35 and a freelancer’s financial affairs are well run, everyone benefits - and breaches of the law, however unintentional, diminish significantly. An air of studied detachment is no longer appropriate: a sensible level of interdependence and mutual cooperation is in the interest of all parties.”