HMRC IR35 guidance still problematic, PAYE agencies not yet out of the woods

This article is a copy of an article on the ARC website

“The recent furore over HMRC guidance that draws umbrella companies into scope of new IR35 rules may have died down, but the problem hasn’t gone away” say the recruitment and employment law specialist Lawspeed and the Association of Recruitment Consultancies (ARC).

In HMRC’s latest publication it accepts that “it is considering what action is required to correct an unintended widening of the definition of an ‘intermediary’ in the legislation.”  This widening impacts on employment businesses (agencies) that provide temp placements.

Lawspeed explained the problem. “Previous IR35 legislation provided for an exclusion from scope where the individual had no material interest (defined as at least a 6% interest in a company) and/or was being paid by way of employment income. The exclusion had the effect of catching personal service companies but ruling out agencies and umbrella companies. However HMRC in its new guidance has interpreted the new legislation as meaning that these exclusions will not apply.

“If HMRC is correct the new IR35 rules, effective from April next year, will apply to all placements of temp workers, requiring hirers to account to HMRC for all (including employer) NICs and PAYE for all supplied temporary workers, and for the agency to do the same for umbrella workers. Agencies and umbrellas will have to be paid net, forcing payroll responsibility onto the hirer.”

“No one in the hiring chain will find this acceptable” says ARC. “It was never the intention of Parliament to draw into scope agencies or umbrella companies already paying by way of employment income or companies in which the individual had no material interest. Our legal advice is that there are compelling reasons why HMRC’s interpretation is wrong.”

ARC continued “Whilst HMRC now recognises there is a problem we are not out of the woods yet. HMRC states that it is considering “a legislative change …. to ensure the OPW rules apply as intended“. This may imply that the legislation may be changed to reflect HMRC’s view, not the other way round. However it is not clear what actually is intended on this point. If the guidance (which presumably reflects what is intended, noting that HMRC has not changed the guidance) is followed agencies paying the individual (i.e. PAYE agencies) and umbrella companies will be subject to the IR35 rules. Whilst HMRC says the rules will not be applied this way, it cannot have it both ways. The uncertainty arising from such a two handed approach would likely detract from the appeal to hirers of using agency workers going forwards.

The key point is all consultations around the new IR35 rules have been on the premise that intermediaries in which the individual has no material interest (or pay by PAYE) are excluded from scope. A switch to include such intermediaries if HMRC thinks there has been a circumvention of the rules (the reason given by HMRC for inclusion of the last minute change to the Finance Act 2020) is a fundamental change with significant consequences as explained in this article. This should not be allowed to be finessed into law without proper consultation. Clarity is required and let’s hope it’s a molehill not a mountain!

“In conclusion the easiest way for HMRC to resolve this would be to amend its guidance. If it chooses to push for legislative amendment we may face more twists and turns and there may need to be more consultation depending on the change proposed. One way or another this issue must be addressed as soon as possible for the sake of clarity at a time when everyone requires more certainty, not less. This issue is too important to let slip.”

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