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HMRC moves to reassure umbrella companies over IR35 legislation changes

Recent comments circulated in the recruitment sector space have caused concern regarding the potential impact on umbrella companies (the companies paying the contractors) resulting from the wording in the new IR35 legislation contained within Finance Act 2020.

In response, HMRC, following discussions with recruitment sector representative bodies, have issued a statement to provide reassurance to umbrella companies. We have set out the clarification below. 

What were the areas of concern?

In particular FA 2020 updates the provisions in the existing IR35 legislation and rather than replicating the existing legislation for the public sector (in place since 2017), further wording was added.  More specifically, additional conditions were added to one of the tests to define a Personal Service Company (or more correctly an intermediary), but rather than enhancing the existing provision, the absence of an “and” in the wording of the particular legislation (Section 61O ITEPA 2003 for reference) this was interpreted instead by some in the temporary labour industry as re-classifying an umbrella company as an intermediary. 

If that interpretation is correct, this reclassification would result in treating an umbrella company as a PSC, which in turn would mean the party which pays the umbrella company, usually a payment agency with the relationship with the end client for which the contractor provides their services, becomes the “fee payer”. The implications for this is that the agency should operate PAYE/NIC on payments to the umbrella company, rather than paying the umbrella company gross therefore making the umbrella model defunct as there would be no rationale for the umbrella company to operate PAYE/NIC.  

Currently as the legal employer of the workers, umbrella companies operate PAYE/NIC deductions and deal with related matters such as the Apprenticeship Levy and pension auto enrolment contributions.

HMRC’s response 

Following discussions between HMRC and recruitment sector representative bodies, HMRC issued a statement saying while they recognise the issue, this interpretation does not reflect the intention of the legislation.  HMRC has promised that steps will be taken before 6 April 2021 to consider what the most appropriate course of action is required to ensure the off-payroll working rules apply as intended as they seek to provide certainty to recruitment sector business affected by the IR35 reforms.

Need further information?

We have a strong team of experienced IR35 experts who are already helping businesses assess the impact of the new rules and prepare for their introduction. Our IR35 in the private sector hub outlines our support services and details BDO’s off payroll labour tools that you may find useful.  
 

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