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Umbrellas to be explicitly excluded from IR35 reforms

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In an embarrassing episode last week, HM Revenue & Customs admitted that poor drafting of the Finance Act had unintentionally included umbrella companies within the scope of the forthcoming extension of the Off-Payroll IR35 rules to the private sector.

The error, highlighted by an IR35 ancillary services firm, would have meant that umbrella companies or other companies directly remunerating “inside IR35” contractors would have been classed as “intermediaries” for the purposes of the legislation.  As payments to intermediaries are intended to have PAYE deductions made from them at source, the umbrella company would have been receiving the net salary of the contractor, effectively making the umbrella’s role as payroll agent redundant.

The financial secretary to the treasury, Jesse Norman MP, confirmed that a “technical change” to the Off-Payroll rules will be made in next year’s Finance Bill to correct the erroneous clause.  “This will ensure the legislation operates as intended from 6 April 2021 for engagements where an intermediary is a company,” he said. “The change will correct an unintended widening of the definition of an intermediary, which went beyond the intended scope of the policy.”

Responding to the update, Dave Chaplin, CEO and founder of compliance solution IR35 Shield, who discovered the error, 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.”

He did however also note that the drafters of any new amendment will need to exercise care in order to ensure that the changes won’t cause further problems:

“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.

“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, CEO and founder of Professional Passport, said: “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.”