Important changes to the new IR35 regime were announced in the Budget (3 March 2021), according to an Insights report from the Osborne Clarke Workforce Solutions team.
The team reported that in addition to the Budget announcements, there have been developments in relation to how companies have been planning for the new IR35 regime including use of insurance-backed checking services, use of umbrella companies, and the impact on M&A planning.
Budget measures you may have missed
- As stated by HMRC in November, the error in the 2020 Finance Act (which enacted the new IR35 regime) will be corrected so that umbrella and PAYE workers are not also caught by IR35. Instead it appears that the legislation will only apply to supplies of workers where: (i) PAYE and NICs are not applied in full and (ii) the worker has any interest in the intermediary via which they are supplied. The latter condition extends the scope of IR35, which had previously only applied where there was an effective shareholding of more than 5% in the intermediary.
- A Targeted Anti-Avoidance Rule (TAAR) will target any arrangements where the main purpose, or one of the main purposes, is to gain a tax advantage by taking the engagement outside IR35. Effectively this means that, if companies are using models that happen to fall outside IR35 (such as certain types of statement of work (SOW) arrangement), they will need to be able to demonstrate that the arrangement is something they would be doing anyway for good commercial reasons. Osborne Clarke has certainly seen SOW models and the like adopted for good commercial reasons. Models, which are, however, a pure workaround to circumvent IR35, may be caught.
- Intermediaries will be obliged to confirm to persons in the supply chain whether IR35 qualifying conditions are met (in terms of what the worker has been paid). At the moment, only the contractor has that obligation.
- If anyone in the supply chain provides fraudulent documentation relating to IR35 status and related payments then they may be liable under IR35 (which may get others in the chain who have relied on that documentation off the hook). Previously, the “fraudulent documentation” get out only applied if the contractor him or herself provided that documentation.
The detail of these measures should be available on 11 March when the Finance Bill is published.
Insurance-backed IR35 checking services- are they working?
Meanwhile, the team said that they continue to see insurance-backed IR35 checking services used by staffing companies and end-users. As previously indicated, if these are not structured correctly, there are potentially material risks for staffing companies and end-users under the 2006 managed services companies (MSC) tax legislation.
That legislation focuses on whether people are effectively enabling contractors to operate via personal service companies. Provision of tax insurance to organisations in the contract chain is one of the things specified in the legislation as potentially triggering liability.
“We recommend that any organisation seeking to use these services takes legal advice on the potential impact of the MSC legislation and, in particular, sections 61 B and C of ITEPA (the Income Tax (Earnings and Pensions) Act), and structure their use of external checking services carefully to minimise this risk,” said the Workforce Solutions team.
Use of umbrella companies
Many are looking to use umbrella companies to payroll the contractors who “fail” IR35. All should remember that HMRC expects users of intermediaries like umbrellas to do full checks on them via the supply chain due diligence principles – GOV.UK (www.gov.uk) and has issued a number of alerts about tax avoidance schemes operated by certain (but by no means all) umbrellas.
In addition, the Criminal Finances Act (CFA) effectively requires staffing companies to spot-check evidence of how and where, in the case of any umbrella via whom a significant number of workers are engaged, the workers are paid. As a result of the changes to IR35, some end users are now dealing with umbrella companies direct, so they will also need to review their CFA policies to ensure that they are carrying out similar checks. Osborne Clarke believes that well-established umbrella companies will be happy to co-operate with this.
Impact on M&A plans
The team said that it believes evidence of compliance with TAAR requirements, correct structuring of third-party checking services and spot-checks on payments via umbrellas will become increasingly important issues in due diligence exercises carried out by investors in M&A and funding deals involving staffing and consultancy companies.
“IR35 issues, and what companies are doing to deal with it, are coming up a lot in current deals on which we are advising,” said the Workforce Solutions Insights report.
*This article is current as of the date of its publication (4 March 2021) and does not necessarily reflect the present state of the law or relevant regulation.
The full report can be found on the Osborne Clarke Workforce Solutions page here.
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