Written on 4 Mar 2021
by Frances Lewis OSBORNE CLARKE
For more information on IR35 join our free webinar hereImportant changes to the new IR35 regime were announced in the Budget (3 March 2021). These include correction of an error in the 2020 Finance Act that affected users of CIS and other sole traders, umbrella and PAYE workers, a rule to target IR35 avoidance, further obligations for intermediaries, and updated "fraudulent documentation" measures. Meanwhile, in addition to the Budget announcements, there have been developments in relation to how companies have been planning for the new IR35 regime including use of insurance-backed checking services, use of umbrella companies, and the impact on M&A planning.
An error in the 2020 Finance Act (which enacted the new IR35 regime) will be corrected so that PAYE umbrella and agency workers are not caught by IR35. Instead it appears that the legislation will only apply to supplies of workers where: (i) PAYE and NICs are not applied in full and (ii) the worker has any interest in the intermediary via which they are supplied. The latter condition extends the scope of IR35, which had previously only applied where the worker had a shareholding of more than 5% in the intermediary.
A Targeted Anti-Avoidance Rule (TAAR) will target any arrangements where the main purpose, or one of the main purposes, is to gain a tax advantage by taking the engagement outside IR35. Effectively this means that, if companies are using models that happen to fall outside IR35 (including certain types CIS payment intermediaries), they will need to be able to demonstrate that the arrangement is something they would be doing anyway for good commercial reasons. Models which are a pure workaround to circumvent IR35, may be caught.
Intermediaries will be obliged to confirm to persons in the supply chain whether IR35 qualifying conditions are met (in terms of what the worker has been paid). At the moment, only the contractor has that obligation.
If anyone in the supply chain provides fraudulent documentation relating to IR35 status and related payments then they may be liable under IR35 (which may get others in the chain who have relied on that documentation off the hook). Previously, the "fraudulent documentation" get out only applied if the worker him or herself provided that documentation.
The detail of these measures should be available on 11 March when the Finance Bill is published.
Insurance-backed IR35 checking services
Meanwhile, we continue to see insurance-backed IR35 checking services used by staffing companies, subcontractors and end users. If these are not structured correctly, there are potentially material risks under the 2006 managed services companies (MSC) tax legislation. That legislation focuses on whether people are effectively enabling workers to operate via personal service companies. Provision of tax insurance to organisations in the contract chain is one of the things specified in the legislation as potentially triggering liability.
We recommend that any organisation seeking to use these services takes legal advice on the potential impact of the MSC legislation and, in particular, sections 61 B and C of ITEPA (the Income Tax (Earnings and Pensions) Act), and structure their use of external checking services carefully to minimise this risk.
Use of umbrella companies
Many are looking to use umbrella companies to payroll the workers who "fail" IR35. All should remember that HMRC expects users of intermediaries like umbrellas to do full checks on them and has issued a
number of alerts about tax avoidance schemes operated by certain (but by no means all) umbrellas. The term "umbrella company" has no legal definition and in practice covers a range of payroll arrangements offered to the contractor market. It's important to be aware that some CIS subcontractors work through personal service companies. This means that end users will need to ask supplier agencies whether any of the workers they use will continue to contract via their PSCs after 6 April and, if so, how such supplies will be dealt with post 6 April. End users will also need to carry out status determinations in relation to any arrangement that involve or might involve the use of a PSC subcontractor.
If PSC contractors are planning to switch to PAYE umbrella arrangements then end users will need to carry out checks on the supply chain to ensure that umbrella companies are deducting full PAYE and NICs from contractors' pay. Now that a targeted anti avoidance rule is being introduced, It will also be important to check that any CIS supply that argues a lack of supervision, direction or control over how the contractor works, reflects the factual reality of the arrangement and is not an obvious IR35 work around.
The Criminal Finances Act (CFA) effectively requires staffing companies/labour suppliers to spot-check evidence of how and where, in the case of any umbrella via whom a significant number of workers are engaged, the workers are paid. As a result of the changes to IR35, some end users are now dealing with umbrella companies direct, so they will also need to review their CFA policies to ensure that they are carrying out similar checks. We believe well-established umbrella companies will be happy to co-operate with this.
Impact on future plans
We believe evidence of compliance with TAAR requirements, correct structuring of third-party checking services and spot-checks on payments via umbrellas will become increasingly important issues in due diligence exercises carried out by investors in M&A and funding deals. IR35 issues, and what companies are doing to deal with it, are coming up a lot in current deals on which we are advising. As a heavy user of off-payroll labour, IR35 is likely to have a significant impact on the construction industry. It will be important for construction contractors to keep evidence of the status determinations and checks they have carried out to protect their companies from IR35 liability.
About the author
Written by Frances Lewis, Head of the Workforce Solutions practice at law firm, Osborne Clarke https://www.linkedin.com/in/frances-lewis-9680b119/