IR35: a welcome sigh of relief

Changes to IR35 from April 2021- reminder

Under the IR35 rules, from April 2021, large and medium sized businesses in the private sector will be required to determine the employment status of any contractors providing their labour to the business through personal service companies (PSCs) or other intermediaries and, if appropriate, operate PAYE and make national insurance contributions.

Broad definition of intermediary in the Finance Act 2020

We previously reported that the final IR35 legislation in the Finance Act 2020 had broadened the circumstances in which the new rules could apply to a contractor providing labour to an end user through a company. 

The Finance Act 2020 expanded the definition of a company intermediary from PSCs (defined as those companies in which the contractor (either alone or with their associates) holds more than 5% of the ordinary share capital) to include any companies 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.

This was intended to capture those situations where the contractor held 5% or less of the share capital in their company. However, on a strict reading of the legislation, the definition also covered arrangements where the contractor was an employee of an agency or umbrella company even where the agency or umbrella was tax compliant and operating PAYE/NICs in full.  This implied that end users would have to do a status determination for employees of agencies and umbrella companies and raised serious questions about whether it was still worthwhile from a tax perspective using agencies and umbrella companies at all.

HMRC guidance offers re-assurance about employees of agencies and umbrella companies

Recently released guidance by HMRC confirms that the new IR35 rules will not apply where:

• a contractor is providing their services through a company;

• the contractor is already engaged under a contract of employment; and

• the contractor’s earnings are subject to PAYE by another party, other than the contractor’s own company.

Our interpretation of the guidance is that where a contractor is supplying their services via a company, HMRC will not require the new IR35 rules to be operated if the contractor is an employee of a third party such as a UK based agency or umbrella company. In those circumstances it is the agency or umbrella which is responsible for operating PAYE/NICs. However, if the contractor (or their associates) holds any shares in the company and/or manages and controls the company (irrespective of whether they hold any shares in that company) the new IR35 rules will apply.

Our conclusion – HMRC will not enforce the broadest definition

Whilst it is not ideal that the legislation does not set out the specific circumstances in which the IR35 rules apply and that businesses have to rely on HMRC guidance, all parties in the labour supply chain can breathe a sigh of relief that the very broad definition of company intermediary will not be enforced by HMRC.  End users will, however, need to have appropriate procedures in place to identify any company which is the contractor’s “own company” and not only consider whether the contractor (or their associates) holds shares in that company.