Amendments to the IR35 rules and what they mean for businesses
With IR35 reform in the private sector looming, HMRC have published a number of technical amendments to the incoming rules that businesses impacted by the off-payroll changes need to pay close attention to.
These updates were published on 3rd March as part of the Budget, in which Chancellor Rishi Sunak chose not to address the issue of IR35 reform in the private sector. As a result, IR35 changes will certainly be enforced on 6th April, following a 12 month delay.
The reform will see medium and large businesses tasked with determining the IR35 status of contractors. The liability, which currently sits with the contractor, will be shifted to whichever party handles payments to the worker, mirroring changes rolled out in the public sector in 2017.
While most of the requirements under the reform were revealed some time ago, businesses need to be aware of and understand how the following adjustments to the final legislation affect them.
Definition of ‘intermediary’ clarified
HMRC have cleared up confusion concerning the unintended widening of the term ‘intermediary’. Under the incoming reform, the original definition of ‘intermediary’ not only applied to personal service companies but also umbrella companies.
This led to concern over the role of umbrella companies, given it could have seen agencies become responsible for making PAYE deductions prior to paying the contractor – effectively making umbrella companies redundant.
However, following the update, ‘intermediary’ now excludes umbrellas, clarifying the issue. As a result, IR35 reform will be rolled out as intended – meaning the fee-payer will deduct the appropriate PAYE tax from the worker, not before it reaches the worker’s intermediary.
“A new provision to address the unintended widening of the definition of an intermediary, where it is a company. This provision states that the company will meet the conditions of an intermediary where the worker has a less than material interest, but only where the payment the worker will receive would not already be taxed as employment income. This means that umbrella companies, agencies and other third-party companies providing a worker’s services will not be in scope of the rules.”
Introduction of new anti-avoidance rules
The Government have also included a ‘Targeted Anti-Avoidance Rule’ (TAAR) as part of IR35 reform. This is designed to prevent the proliferation of tax avoidance schemes, such as disguised remuneration arrangements that pay contractors via loans to avoid IR35.
“A Targeted Anti-Avoidance Rule (TAAR) to deter against arrangements devised to circumvent the definition of an intermediary to gain a tax advantage. This is in response to stakeholder feedback that some promoters may look for new ways to avoid the conditions.”
By introducing this amendment, it’s clear HMRC are keen to avoid a repeat of the Loan Charge scenario. It could also be viewed as a pre-emptive measure to stop any further contrived workarounds to IR35 from surfacing in future.
Having promised to work alongside IR35 stakeholders when devising the specific rules for IR35 reform, HMRC made two further changes following feedback from impacted parties.
Clients able to confirm PSC status
When reform is introduced, end clients will carry out IR35 assessments and therefore need to know if an individual works through a UK-registered Personal Service Company (PSC), meaning IR35 becomes a consideration.
To support compliance, businesses will be encouraged to ask the contractor or the intermediary they work through (for example a consultancy) about their status as a PSC.
“A minor change to allow an intermediary to confirm if one of the conditions for an intermediary is met, where the worker has not done so. This will make it easier for client organisations to ascertain whether or not they need to consider the rules.”
IR35 liability can transfer to any party (other than the contractor)
The final amendment is an important one. As part of IR35 reform, supply chain parties who provide incorrect information claiming that a worker isn’t caught by IR35 will be transferred the risk, irrespective of whether they are the fee-payer.
For example, if a non-fee-paying recruitment agency was to confirm that a contractor operates outside IR35 (when in reality the engagement belongs inside IR35), they will shoulder the risk and be held responsible for outstanding tax liabilities.
“A further change to extend the consequences of providing fraudulent information to include any UK-based party in the labour supply chain. This means that, where someone other than the worker provides fraudulent information claiming that the rules do not apply, the subsequent liability will rest with that party instead of the client organisation or deemed employer.”
Above all else, this specific change highlights how important it is that all parties in the supply chain collaborate and carry out well-informed IR35 assessments. After all, any party (contractors aside) could become liable should they provide incorrect information.
Qdos supports thousands of businesses, helping them manage IR35 reform. The Qdos Status Review facility provides a range of expert IR35 solutions, including IR35 status reviews and IR35 insurance, to allow businesses to compliantly place and engage contract workers. For more information, please get in touch on [email protected] or 0116 478 3390.