An unexpected and potentially seriously harmful consequence of reformed IR35 regulations has been uncovered by the Financial Times: the rise of unscrupulous, non-compliant Umbrella Companies that are falsely promising public sector contracting professionals favourable tax treatment.

The FT reported that thousands of social workers, nurses and other public sector locums are being drawn into risky avoidance schemes in an effort to circumvent the IR35 tax clampdown on “disguised employment” in the public sector, which took effect in April.

Rogue Umbrella Companies superficially perform a similar function to their reputable counterparts, which provide payroll services and act as employers for contracting professionals. Many contractors have used these companies for the administrative benefits that they offer, such as dealing with tax and National Insurance deductions automatically.

A new breed of non-compliant Umbrellas has been emerging since April. These companies have been exploiting contractors who are desperate to avoid the major cuts to their income brought about by IR35 changes and abusing the tax system.

Julia Kermode, CEO of the Freelancer and Contractor Services Association, told the FT: “We are aware there are lots of dubious schemes out there. We have seen a definite increase since the changes in April because people are not being able to work through companies and are instead taxed as employees. They are losing money and that is why they are going with dodgy schemes.”

The rise of these avoidance schemes is an indicator of the severe disruption caused by the new IR35 rules, which are widely anticipated to be rolled out to the private sector at some point.

A new survey of 1,500 public sector contractors by contracting advice website ContractorCalculator found that 75 per cent of public sector organisations have lost top contractor talent since April. The website’s CEO, Dave Chaplin, told the FT: “We have heard stories about departments where whole floors have been cleared out as IT workers shifted to the private sector.”

Nurses and social workers may be especially vulnerable to the new avoidance schemes, as they are rarely considered to be self-employed for tax purposes. Conventionally, they have used fully compliant Umbrellas to enable them to work flexibly in their chosen profession. However, growing numbers are falling prey to unscrupulous schemes promising them as much as 90 per cent of their gross pay.

Seb Maley, CEO of Qdos Contractor, said that these rogue companies are growing, some of them massively, at the expense of reputable, fully compliant Umbrellas.

Meanwhile, Tom Hadley of the Recruitment and Employment Confederation warned: “Umbrella companies are liable for any failure to pay appropriate tax, but as of 30th September, it will also be a criminal offence to fail to prevent tax evasion by an associated person.”

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