At the start of 2020, a number of my clients were in the throes of making arrangements for the forthcoming changes to the IR35 rules, which extend the off payroll working rules to the private sector. You will recall that those new rules were intended to take effect in April 2020, but have since been put back to April 2021, a mere 3 months from now, because of COVID-19.
Essentially, the purpose of IR35 is to target individuals who work via their own limited companies, while still performing the same work under the same conditions as normal employees. In other words, ensuring that someone working in exactly the same way as a traditional employee, not a truly ‘self-employed’ person, albeit providing their services through an intermediary (usually a personal service company (PSC)), could be caught by the IR35 rules.
To comply with IR35, the contractor needs to ensure that both the wording of the relevant contract, as well as the assignment that is undertaken, demonstrate that the contractor is genuinely ‘in business on his/her own account’, not merely a ‘disguised employee’ (a term used by HMRC).
Until now, in the private sector, it was that intermediary’s responsibility to determine the tax position for the relevant individual. From 6 April, the burden for making that assessment will shift to the end user. Indeed, it will be responsible for making a ‘status determination statement’.
Much confusion has surrounded the definition of what constitutes an “intermediary” in relation to IR35. Currently, HMRC defines an intermediary as “any person who makes arrangements for an individual to work for a third party or pay for work done by a third party”. Now it seems HMRC has acknowledged that clarification is needed, with a technical change promised in the next Finance Bill.
An announcement in November stated that the amendment will “correct an unintended widening of the definition of an intermediary, which went beyond the intended scope of policy”, which has been taken to mean that umbrella companies will not be considered an intermediary.
The status of umbrella companies has been somewhat of a grey area, with many interpreting that they can in fact be classed as intermediaries for the purposes of IR35.
The change will be effective from 6 April 2021 for engagements where an intermediary is a company. It is likely to reassure contract professionals that working with a compliant umbrella company will be a safe alternative to operating as a limited company.