A last minute change to the new IR35 rules, contained within Chapter 10 of ITEPA, and HMRC’s interpretation of that change, has caused considerable confusion and concern within the industry.
HMRC’s employment status manual advises that the new IR35 rules will apply to any worker who supplies their services through an intermediary, irrespective of whether they have a material interest in that intermediary. It may well be the case that this interpretation is designed to catch those operating tax avoidance schemes, however the effect is much wider and threatens the entire recruitment sector.
All agency workers, by definition, will be supplying their services through an intermediary. However, the new and existing IR35 rules were considered only to be applicable if the worker had a material interest in that intermediary or they were not paid by way of employment income. The HMRC guidance states that the new rules apply to any worker who receives payment for their services from an intermediary (a chain payment). An employment business is such an intermediary. This would mean that the new IR35 rules would treat agencies and umbrellas in the same way as PSCs, fundamentally changing the nature of the recruitment industry, and goes far beyond the stated purpose of IR35 to tackle disguised employment and associated tax avoidance.
If this guidance is correct, the new rules will apply to ANY agency worker supplied to a UK based hirer who is not a small company. Hirers will be required to issue status determination statements and meet compliance requirements in all cases. Where an engagement is deemed to be inside IR35 and an agency supplies a worker to the hirer, the hirer will be obliged to make payment. This payment will necessarily be net of PAYE and NICs and the hirer will have to account for Employer NICs. Whilst there are rules about apportionment, this situation will be unacceptable to both agencies and hirers. To avoid the situation arising, agencies may want to use umbrellas, but here also the agency will be required to pay the umbrella net and account for Employer NICs. This would cause great difficulties, and the overall consequence of applying the IR35 rules in this way is likely to dissuade the use of temporary agency workers.
HMRC have stated that Chapter 10 is not ‘intended’ to apply to workers who are paid by way of employment income, but this is not what the law says and if the law intended those workers to be excluded then the legislation should reflect that. However it does not. If the intention was not to affect PAYE temp workers and umbrella employees, then HMRC need to issue urgent clarification.
At this time of uncertainty with businesses already struggling with the effects of COVID and looming Brexit, the last thing they need is further confusion over IR35, which many agencies and hirers were just beginning to get to grips with.
ARC on behalf of its members and its legal advisers, Lawspeed, are in discussions with HMRC to try to get these matters clarified. This could well be an unintended consequence of improperly formulated guidance, but the matter requires urgent clarification.