Final changes to the Off-Payroll legislation contain an errant clause which has redefined intermediaries and now appears to make the use of payment intermediaries redundant. The legislative issue and the extent of its repercussions have been documented in a technical paper, produced by compliance solution provider IR35 Shield, which its CEO and founder Dave Chaplin has shared with HMRC and some specialist tax and legal advisors.
New changes introduced to Chapter 10 of the Income Tax Act 2003 via The Finance Act 2020 which reached Royal Assent on 22nd July 2020 broadens the definition of an ‘intermediary’ to include any company which makes a ‘chain payment’ to a worker.
The legislation requires that remuneration is treated for employment tax purposes before reaching the intermediary, meaning the agency needs to process the tax deductions, effectively rendering the role of the umbrella company redundant. This poses numerous challenges for the entire supply chain.
The consequences hinge on what would appear to be an innocuous amendment to section 61O of the Finance Act and how it defines an intermediary. But the change means that from April 2021 an umbrella company is an intermediary and the agency is therefore a ‘fee-payer’.
As an example, a recruitment agency sources a contractor for a client whose subsequent status assessment returns an ‘inside IR35’ determination. The client provides a Status Determination Statement (SDS), freeing them of fee-payer responsibilities, while the agency invites the contractor to trade via an umbrella company for the duration of the contract. The supply chain now consists of the client, recruitment agency, umbrella company and contractor.
According to the amended legislation, the umbrella company would be considered the intermediary in this scenario as it is the party from whom the contractor receives a chain payment. Meanwhile, the agency – the party in the supply chain immediately above the intermediary – becomes the fee-payer and assumes the associated responsibilities, including the deduction of tax at source via PAYE. This allocation of responsibility renders the role of the umbrella company redundant.
This might seem counterintuitive given the fact that umbrella company engagements facilitate the tax treatment required by an ‘inside IR35’ determination but legal advisers agree that it is unambiguous and the correct interpretation of the amended law.
Commenting on the impact that this amendment could have, Dave Chaplin said: “These changes are potentially disrupting for umbrellas and the agencies that reply upon them. Many agencies legitimately use umbrella companies to avoid operating their own payroll and may now need to bring their payroll inhouse – for which many providers also offer a service.
“We are unsure what the specific purpose of the change to 61O was intended to achieve, but we find it hard to believe that the plan was to shut down the entire umbrella industry. There has been historic controversy surrounding tax avoidance schemes operating under the guise of umbrella companies, but the industry has worked hard to self-regulate and try and prevent these firms from operating.
“It is hard to believe, without any announcement, that legislators have decided that agencies should be responsible for all tax deductions, thereby removing payment intermediaries from the supply chain.
“Whilst we wait for clarification from the Treasury, it would be advisable for agencies to seek professional views from their advisors before deciding next steps to take.
“The industry has pivoted before and will do so again but, with just six months to go before the legislation takes effect, the supply chain needs clarity and certainty as a matter of urgency.”