Umbrella firms will not be included in IR35 reforms.
HMRC has admitted that a draft of the Finance Act mistakenly included umbrella companies within the purview of upcoming private sector IR35 reforms. The mistake was only brought to light after it was pointed out by IR35 ancillary services company IR35 Shield.
The mistake would have meant that umbrella companies and other firms remunerating contractors who are “inside IR35” would be classed, within the legislation, as “intermediaries”.
Payments made to such intermediaries are meant to have deductions for PAYE made at their point of origin. This means that, were umbrella companies included, they would be receiving a contractor’s net salary, rendering redundant their role as payroll agent.
Jesse Norman MP, Financial Secretary to the Treasury, confirmed that the error would be rectified in next year’s Finance Bill. Norman commented: “This will ensure the legislation operates as intended from 6 April 2021 for engagements where an intermediary is a company.”
“The change will correct an unintended widening of the definition of an intermediary, which went beyond the intended scope of the policy,” Norman added.
IR35 Shield CEO and founder Dave Chaplin said: “It’s encouraging that the Treasury has finally vindicated the conclusions we reached in September, namely that the Finance Act needed changing to cater for umbrellas.”
“Hopefully we will see what those changes are very soon, because firms will be making decisions from January 2021. We will continue to work with HMRC to try and help them resolve this issue.”
Chaplin, however, cautioned those drafting any new amendments that care will need to be taken in future to guard against changes causing further issues, saying: “Firstly, it is important to understand that laws are defined within the legislation, and not by HMRC guidance. It is now a case of waiting to see what specific legal amendments are proposed, and then determining what those mean.”
Chaplin added that: “This isn’t quite the simple territory some might believe. The fear is that it could fix one problem whilst creating another. It will take both time and the finest legal minds at the Treasury to make sure they get it right.”
“We think they will, but we must all wait. Until then, firms are advised to sit tight, wait a few weeks and see how things progress.”
“Despite this one appearing to miss everyone’s radar since March, thankfully it was caught now, and not weeks before April 6th 2021, otherwise it would have been too late.”
Crawford Temple, founder and CEO of advisory firm Professional Passport, commented: “We welcome the government’s intention to update the off-payroll working rules in the next Finance Bill. The errant clause that was pointed out by [Dave Chaplin] would have posed problems for umbrella firms and the entire supply chain.”
“The new legislation that is set to go ahead in April 2021 will mean that more contractors will be seeking to work through umbrella models, allowing them to continue working on temporary assignments whilst enjoying all the employment rights and benefits that come with employment.”
Author: Steven English