IR35: workers already subject to PAYE not caught by new rules

An HMRC update, published yesterday, will be relevant where workers provide services to a third party through a range of intermediary companies and the worker is already subject to PAYE. Examples include umbrella companies; agencies; and employers seconding employees.

The update followed a meeting between stakeholders and HMRC, which took place amidst increasing concern regarding the definition of an intermediary in the new IR35 legislation that was introduced in the 2020 Finance Act. An amendment to the draft legislation was made to "protect against arrangements put in place to side step" the new rules, HMRC has said. However, there was no intention to further widen the application of the rules and stakeholders should continue to follow HMRC's published guidance when preparing for the reforms.

Penny Simmons, a tax risk expert at Pinsent Masons, the law firm behind Out-Law, attended the meeting with representatives from HMRC. She said: "It was a very constructive discussion. HMRC understood the issue and was steadfast in its intention to review what action is needed to ensure that the legislation works as is intended and all stakeholders – businesses, agencies, umbrella companies and contractors - receive the clarity and certainty that they need before the new rules take effect in April".

"As originally drafted, the legislation would not have covered arrangements where a worker is engaged to provide services to a client through an umbrella company and that worker is subject to PAYE as an employee of the umbrella company. However, the definition of an intermediary was widened and an unintended consequence of this is that umbrella companies and some agency arrangements could now constitute intermediaries," she said.

The IR35 rules require that employment taxes be paid by people who provide services to a business through an intermediary, usually a personal service company (PSC), if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

The rules are due to change from 6 April 2021. From this date, engaging businesses will be made liable for determining whether the IR35 rules apply. They will also be required to operate PAYE and pay employers' National Insurance Contributions. The changes will not apply to small businesses which engage contractors through PSCs.

The changes were originally due to take effect this April, but the start date was delayed a year as a result of the coronavirus pandemic.

"Stakeholders should be reassured by both the statement that HMRC issued yesterday and the speed with which the statement has been published. We look forward to continuing to work closely with HMRC to ensure that the rules operate as intended," said Simmons.

HMRC off-payroll working stakeholder update (1-page / 122KB PDF)