Clause in IR35 makes umbrellas redundant and makes agencies the ‘fee-payer’

An “errant clause” in the controversial off-payroll legislation that is due to be implemented next April has redefined ‘intermediaries’ and now appears to make the use of payment intermediaries redundant, according to IR35 expert Dave Chaplin.

IR35 Shield, of which Chaplin is CEO and founder, has shared the legislative issue and the extent of its repercussions in a technical paper with HM Revenue & Customs and some specialist tax and legal advisers.

According to IR35 Shield, new changes introduced to Chapter 10 of the Income Tax Act 2003 via The Finance Act 2020, which reached Royal Assent in July, broadens the definition of an ‘intermediary’ to include any company that makes a ‘chain payment’ to a worker.

The legislation requires that remuneration is treated for employment tax purposes before reaching the intermediary, meaning the agency needs to process the tax deductions, effectively rendering the role of the umbrella company redundant. “This poses numerous challenges for the entire supply chain,” Chaplin said in the IR35 Shield statement.

The change means that from April 2021, an umbrella company is an ‘intermediary’ and the agency is a ‘fee-payer’, assuming the associated responsibilities, including the deduction of tax at source via PAYE. This, Chaplin says, renders the role of the umbrella company redundant.

“It is hard to believe, without any announcement, that legislators have decided that agencies should be responsible for all tax deductions, thereby moving payment intermediaries from the supply chain.

“Whilst we wait for clarification from the Treasury, it would be advisable for agencies to seek professional views from their advisers before deciding next steps to take,” Chaplin urged.

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