Umbrella companies have always operated at the lower end of the contractor supply chain employing workers who provide services either direct or through an agency to a hirer. They have been able to exist in the context of IR35 tax legislation because they are not organisations in which the individual has a material interest, broadly speaking meaning that the individual worker does not have at least a 5% interest in the company.
However, a recent article by Contractor Calculator “Off-Payroll amendments could pose problems for payroll companies” suggests that this position will change in April 2021 when new Off Payroll rules are set to apply, with the warning that an amendment to the legislation will obviate the role of the umbrella. This is because the definition of an ‘umbrella’ will change so that it will become an intermediary that is treated as a personal service company.
“We beg to differ”, says Lawspeed, the recruitment and employment law specialist. “First off any company that provides an individual through a company has always been classed by the IR35 legislation as an intermediary. Chapter 8 defines an intermediary as being a third party involved in the arrangements where services are provided “…not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”). Clearly an umbrella company is such an intermediary, although the article suggests that this has not been the case.
“Accordingly umbrella companies would always be liable for the IR35 taxes under Chapter 8 and Chapter 10 (current off payroll rules relating to public authorities only) as the third party intermediary were it not for a condition for liability that the worker must have a material interest in the intermediary. Therefore where a worker has no material interest in the umbrella, that intermediary has no liability for IR35 taxes.
“The article now suggests that an amendment introduced in the new legislation to apply in April 2021 changes this position. The condition referred to above has indeed been changed, but not in our view with the interpretation put on it by the article. It appears as follows:
In section 61O(1) (conditions where intermediary is a company) for paragraph (b) substitute—
“(b)it is the case that—
(i)the worker has a material interest in the intermediary,
(ii)the worker has received a chain payment from the intermediary, or
(iii)the worker has rights which entitle, or which in any circumstances would entitle, the worker to receive a chain payment from the intermediary.”
“The first requirement namely that ‘the worker has a material interest in the intermediary’ remains in place. The amended words then follow and are not written in the alternative, as the word “or” does not appear at the end of sub-para (i). Instead if the first condition applies, the subsequent conditions then apply. The result is that organisations in which workers do have a material interest that either make a payment or defer a payment (to which the worker is entitled) must comply with the new IR35 payment rules, in the case of a deferred payment as if the payment had been made.
“There is some confusion as HMRC guidance appears to be at odds with the published legislation, in so far as the guidance adds in the word “or” at the end of the sub para (i) stating that the legislation reads as follows:
(i)the worker has a material interest in the intermediary, or
“The underlined word does not appear in the legislation published online. If the guidance is correct and the published legislation has been subsequently amended, the effect would not only be as described by Contractor Calculator but would be far wider reaching, applying the IR35 rules to agencies who engage contractors on PAYE contracts. This would be because material interest would be irrelevant and the agency would be the intermediary. If correct, this would cause significant uproar in the industry as a whole, not just in relation to umbrella companies. Not only has there been no consultation or process around this kind of extension to the scope of the IR35 rules but it would inappropriately impact every labour supply business in the UK.
In conclusion Lawspeed commented “As always HMRC could make the legislation clearer, so ruling out potential for misinterpretation. The guidance itself unhelpfully appears at odds with the actual legislation. However it is the legislation that applies not the guidance. On the face of the legislation published online the position remains that umbrella companies in which the worker has no material interest can continue exactly as before subject to employment payment rules, and hirers and agencies working with umbrellas can rest easy on this score. The guidance therefore should be amended as soon as possible to avoid further confusion.”
Finally it is worth a reminder that the new rules set to apply From April 2021 will not apply to hiring arrangements where the hirer is a small company, the old rules continuing with no material change.