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Does IR35 amendment rain on umbrella companies’ parade?

Concerns that a final amendment to the IR35 legislation could spell the end for umbrella companies, impacting labour supply businesses across the UK, has prompted the industry to call for the HMRC to clear up the confusion.



An article published by contractorcalculator.co.uk on Thursday, ‘Off-Payroll amendments could pose problems for payroll companies’, warns that final changes to the Off-Payroll legislation could pose a significant problem for umbrella companies and other payroll intermediaries, according to research by IR35 Shield.



The article goes on to state that the legislation requires that remuneration is treated for employment tax purposes before reaching the intermediary, which would effectively render the role of the umbrella company redundant, posing numerous challenges and potential knock-on effects for the contractor supply chain.



Recruitment and employment law specialist Lawspeed said HMRC guidance appears to be at odds with the published legislation.



“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,” the company announced in a press statement on Monday.



“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.



"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.”



UK international legal practice Osborne Clarke published an article exploring the topic on Friday, agreeing that the legislation is “unclear in some respects” and the position is complex.



“Clearly many lawyers will be trying to work out whether the amendment to the legislation does in fact have [an] unintended consequence,” Osborne Clarke stated. “But there does seem to be a strong risk that users of contingent workers paid via gross-pay intermediaries (some of which will be divisions of umbrella companies) and CIS intermediaries will be subject to IR35 and its tax debt transfer regime.” Read the Osborne Clarke article here.



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