Clauses included within the Off-Payroll section of the 2020 Finance Act imply that the role of umbrella companies may be redundant after the April 2021 private sector IR35 rollout, prompting HMRC to rapidly publish clarification on the matter.
This startling prospect is the conclusion of a technical paper produced by compliance company IR35 Shield – which is run by contracting industry titan, Dave Chaplin.
What is the problem?
The problem lies in how the term ‘intermediary’ is defined. Changes to this definition were introduced to Chapter 10 of The Finance Act 2003 via The Finance Act 2020 – which became law in July 2020 (via Royal Asset).
Before this amendment to Section 61O of the Finance Act was made, a sole clause existed – to describe so-called ‘personal service companies’:
‘It is the case that the worker has a material interest in the intermediary.’
However, this definition of an intermediary has now changed, to include this alternative criteria:
‘The worker has received a chain payment from the intermediary.’
The problem is – umbrella companies, other types of payment firms, and possibly even recruitment agencies may now meet the definition of an intermediary.
Current wording implies umbrella companies ‘could become redundant’ after April 2021
Under the terms of the new off-payroll legislation, a payment chain must be established whereby the lowest person in the chain is the intermediary. The ‘fee payer’ is the party in the chain immediately above the intermediary.
The ‘fee payer’ is responsible for working out the income tax due on contract earnings, reporting these details to HMRC, and deducting any tax due.
From April 2021, as the IR35 Shield study points out, an umbrella will meet the definition of an ‘intermediary’, and a recruitment agency is the ‘fee payer’.
Due to the way the responsibilities are allocated under the new rules, this would appear to make the role of umbrella companies redundant!
We asked Dave Chaplin if he thought this was a drafting error, whether it could be rectified and what the next steps were for the industry.
“There was no signalled intent to ensure only agencies were to make the tax deductions, ruling out the use of payment intermediaries, so it would appear the legislators have made a mistake. The challenge though, and we have taken considerable advice on this, is that the amended legislation doesn’t appear to be ambiguous, which may close the door on an alternative interpretation.”
“I’d expect to see clarity provided at some point, but in the meantime it would be prudent for stakeholders in the supply chain to seek advice from specialist advisors in the space.”
HMRC clarifies its position – business as usual for umbrellas
Having been made aware of the problem, HMRC have since (15th October 2020) published a statement making it clear that it was not the intention of the legislation to effectively cut payroll companies out of the recruitment chain. HMRC says it is working with stakeholders to resolve the issue:
The Government’s policy intent in relation to the off-payroll working legislation is clearly set out in its recently published technical guidance. This guidance sets out how HMRC will apply the legislation in practice, and customers should continue to reference it as they prepare for the off-payroll working reform.
“This isn’t the end of the story, HMRC will need to follow up with action”
Chris James, Director of Accounting at JSA, attended a hastily arranged meeting with HMRC to discuss the matter. He explains here:
“HMRC contacted me in my role as Chair of FCSA, along with our CEO Phil Pluck, to invite us to a meeting with several other IR35 Forum members, to discuss this urgent issue.
“I can say that I don’t remember HMRC moving so fast before to deal with a specific aspect of law, and so to see that now is very encouraging.
“In the meeting, HMRC confirmed that they fully accepted there was an issue with the critical clause 61O, and that they would be working to ensure the legislation operated in the way intended.
“They clearly communicated that it is not their intention for an agency or umbrella company, properly applying PAYE to earnings, to be impacted by the Chapter 10 changes.
“They’ve since issued this statement, confirming their approach. This isn’t the end of the story, HMRC will need to follow up with action, but their attitude is clear, and that’s very reassuring for the sector. The last thing business needs right now is more uncertainty.”
“Thankfully we caught this one now, and not in March next year”
Following news of HMRC’s clarification, Dave Chaplin told us:
“This matter has been brewing behind the scenes for quite a while now, and I’m pleased to see that HMRC are finally acknowledging that it is a real problem that requires resolution.”
“I fully expect this matter to be resolved, via a change to the legislation in the next Finance Bill so that it aligns with the intent being described. Because in it’s current form it’s broken and has weird unintended consequences for umbrellas, agencies, consultancies and employees on secondment.”
“Thankfully we caught this one now, and not in March next year, otherwise it would have been too late.”