Clarification of IR35 reforms in Budget
04 March 2021
Helpful clarifications of the forthcoming changes to off-payroll working arrangements in the private sector were contained in a policy paper released by HMRC as part of the 2021 Budget.
The policy paper confirms the timing of the change to the IR35 rules requiring large and medium-sized businesses in the private sector to determine the employment status of contractors who are providing their labour via intermediaries. As widely expected, this will take effect for payments made after 5 April 2021 in respect of labour provided after that date.
In addition, the policy paper provides welcome clarification on the circumstances in which a company will be an intermediary for the purposes of IR35.
The draft IR35 legislation only caught those companies – referred to as personal services companies - in which the contractor had a material interest. In broad terms, a contractor has a material interest in a company if the contractor (either alone or with associates) holds more than 5% of the ordinary share capital of the company.
As we previously reported, the Finance Act 2020 expanded the definition of company intermediary to prevent abuse. It includes any companies from which the contractor has received or has the right to receive a payment which can be reasonably be taken to be a reward for the contractor’s services.
This expanded definition is so wide that it potentially applies to agencies and umbrella companies that are operating PAYE. HMRC released guidance providing reassurance to businesses that this was an unintended consequence, and the new IR35 rules will not apply where the payments received by the contractor are subject to tax in full unless the company is the contractor’s intermediary. There was no guidance, however, on how to determine whether a company is the contractor’s intermediary.
In its new policy paper, HMRC confirms that a company will be an intermediary for IR35 purposes if either:
- the contractor has a material interest in that company; or
- the contractor has received or has the right to receive a payment which can be reasonably be taken to be a reward for the contractor’s services, and which is not wholly taxed as employment income from that company, and the contractor has an interest in that company.
Other technical changes are also going to be made. These include the introduction of a targeted anti-avoidance rule to prevent abuse, and provisions to transfer the PAYE and NICs liability to any UK-based party in the labour supply chain that has provided fraudulent information to others in the chain.
There is just a month to go before the IR35 reforms take effect. If you need further information and a summary of the steps you may want to take to prepare for the new rules, see our Inbrief guide and our recent article Don’t leave IR35 until the last minute.