As reported by Lawspeed and the Association of Recruitment Consultancies last week, current wording inserted into the final version of the legislation, and HMRC’s interpretation of this in guidance, has caused confusion.
To recap, the IR35 rules have not historically applied when a worker paid via PAYE has no material interest in the intermediary. So PSCs are in scope and genuine employment umbrellas, in which the PAYE paid worker has no material interest, are excluded. Last minute changes to the legislation amended the material interest exclusion wording, which HMRC has interpreted to mean that the rule about having no material interest is no longer effective. The key point is whether the material interest exclusion is in the alternative. HMRC says it is, but that interpretation is not clear on the face of the legislation. The legislation does not use the words 'either' and 'or' but HMRC has included these words in its guidance, HMRC's interpretation following suit.
The new HMRC statement attempts to address the problem, but states that the "amendment to the legislation was made as a result of feedback on the draft legislation to protect against arrangements put in place to side step the material interest condition". Instead of providing clarification, this seemingly supports its current approach and guidance. Yet the condition remains in the actual legislation as a primary condition, not in the alternative.
To recap, if HMRC's interpretation is right, PAYE agencies and umbrella companies will only be able to be paid net of PAYE and employee NICs after 6th April 2021 and every affected hirer will have to issue a status determination statement for every single agency worker it hires, and be responsible for accounting to HMRC for employer NICs. This cannot live in the real world if the agency worker sector is to continue.
This is not the end of the story. The statement goes on to say "where a worker is already subject to PAYE on all of the income from an engagement as an employee, other than with their own intermediary, HMRC does not intend Chapter 10 to apply”. Whilst that statement is undoubtedly a true reflection of HMRC's intention, this again conflicts with the new legislation, which does not allow for the ' paid subject to PAYE' exclusion.
Whilst it is clear that by making the statement HMRC recognises the issue, there is no indication that it intends to get to grips with it, and this first response falls short of what is required to settle the issue.
Accordingly, either the guidance should be amended to reflect the 'no material interest exclusion' as set out in the legislation, or the legislation must be amended to reflect what HMRC says is intended. Some kind of hybrid which avoids the consequence we have described could perhaps be expected. Whilst the new law will not apply until 6th April 2021, hirers, agencies and umbrellas are all preparing for the law change now and the sooner the clarification is provided the better. For now at least, the ball is rolling. Watch this space.
