IR35: Contractors, are you working via the quietly tweaked term, ‘company intermediary?’
One silver lining in the cloud of private sector IR35 reform (darkened further by Brexit, Covid and yesterday’s largely contractor-irrelevant Winter Economy plan) which hangs over the freelance contracting sector for 2021 and beyond, appeared to be consistency.
In fact, when Finance Act 2020 containing the off-payroll framework due to bite for April 6th 2021 received royal assent on July 22nd, it appeared that very little had altered from the original legislative draft.
All not what it seems
Unfortunately, appearances can be deceptive. In particular, and to head off the celebrations of those who believe they found a ‘quick fix’ to circumvent the new off-payroll rules (currently incoming from April 2021), the government has very quietly made an extension to the framework’s definition of ‘company intermediary,’ writes Lucy Smith, managing director of Clarity Umbrella.
In simple terms, only large and medium-sized businesses will be required from April 6th 2021 to determine the IR35 status of any roles performed by a contractor providing their labour to the business through Personal Services Companies (PSCs), or other intermediaries. The legislation states that where the role falls in the scope of IR35 (‘inside’), then payments must be made via Pay As You Earn (PAYE), and National Insurance Contributions (NICs) will be due.
Do you have the right to receive pay via the intermediary?
The HMRC guidance is primarily the same as the draft legislation except in one important respect -- they are now looking more technically at the circumstances in which a contractor providing labour to an end-user through a company could be within the scope of the IR35 rules.
The tweak to the legislation now looks more closely at the definition of an “intermediary” for the purposes of the legislation. The amendment looks at defining an intermediary as any company from which the contractor has received, or has the right to receive, a payment which can reasonably be taken to be a reward for the contractor's services to the end-user.
Technical-types might like to see the relevant section here -- it’s below too, in italics:
14 In section 61O(1) (conditions where intermediary is a company) for paragraph (b) substitute—
“(b) it is the case that—
(i) the worker has a material interest in the intermediary,
(ii) the worker has received a chain payment from the intermediary, or
(iii) the worker has rights which entitle, or which in any circumstances would entitle, the worker to receive a chain payment from the intermediary.”
End-users are going to have to look again
Prior to this quietly made update, an end-user would have to consider whether IR35 applied if the company through which a contractor was supplying their labour was an intermediary. Previously, the details suggested that a company would only be an intermediary if it was a PSC or single-person limited company. However, the revision now centres on the definition of a ‘company intermediary.’
It now therefore seems that end-users will have even more to think about when considering if the IR35 rules apply. They will need to look more closely at the working arrangements if a contractor is supplying labour to the end-user through a company, irrespective of whether the contractor has a shareholding in the company.
It would suggest that this has been done specifically to try and eliminate the use of “consultancy arrangements”, whereby a contractor opts to work via a consultancy rather than their own limited company to try to sidestep the regulations. So has HMRC used this tweak as a potential shutdown to this loophole, before the legislation even comes into force? It would definitely seem that way.
Us umbrellas (and agencies) are exempt
On the flip side, there is a specific exception to the rules (s 61K(2)(a) which refers to “agency workers”) where the contractor has contracted directly as an individual via an agency or umbrella company, provided that the agency or umbrella company is operating full PAYE and NICs. This is limited to those circumstances where chapter 7 of ITEPA 2003 applies i.e. where an intermediary has engaged a self-employed individual and operates PAYE and NICs on the basis that it cannot show that the individual is not subject to the right of supervision, direction or control by any person.
So it may be back to the drawing board for some businesses and those consultancies set up to provide a ‘quick fix’ to IR35 reform. With only six months until we see the new rules come into force, even those end-clients who have already implemented changes, will now need to have a swift review of their supply chain and how they choose to engage with any individuals to ensure they minimise their IR35 risks. They might also need to reassess whether their original, sometimes blanket, approach will still provide them with the best protection come April 6th. Those larger institutions that simply knee-jerked and declared they will not engage with PSCs whatsoever, will now likely need to review any companies, including consultancies that they are engaging with.
For clients, the focus is now likely to shift to ensuring that any supplied contractors are employees or treated as employees by a UK agency or umbrella company for all PAYE and NICs purposes. Or in the case of some businesses, that the end-clients engage properly with the relevant experts to do appropriate ‘due diligence’ to check whether that specific company falls within scope of the new ‘intermediary’ definition.
This 11hr change in the definition of corporate 'intermediaries' was, as I've stated earlier, made, and made quietly to stop schemes designed to find a loophole in the incoming off-payroll legislation by ensuring that the contractor and their associates hold no more than 5% of the share capital of the company, through which the contractor provides labour.
When so many businesses were so unprepared for the original implementation in 2020, and with scant offerings to enterprise yesterday from the chancellor, it now begs the question as to whether this quiet tweak by the government simply heaps more burden on UK companies, at a time when they are having to deal with the grave yet still evolving implications of the COVID-19 pandemic.