In the process of extending the off-payroll rules to the private sector in 2021 the Government needed to amend ITEPA 2003 (the legislation governing off-payroll). Under the original legislation there was a requirement for a worker to have a material interest in the intermediary (such as ownership or control of a PSC) to fall within the definition of “intermediary”. The wording looked like this:
61O Conditions where intermediary is a company:
1) The conditions mentioned in section 61N(9)(b) are that—
(a) the intermediary is not an associated company of the client that falls within subsection (2), and
(b) the worker has a material interest in the intermediary.
In the new draft legislation although “material interest” was still referred to the absence of the word “and” meant that it was no longer a requirement in itself. The new wording looked like this:
In section 61O(1) (conditions where intermediary is a company) for paragraph (b) substitute:
“(b) it is the case that—
(i) the worker has a material interest in the intermediary,
(ii) the worker has received a chain payment from the intermediary, or
(iii) the worker has rights which entitle, or which in any circumstances would entitle, the worker to receive a chain payment from the intermediary.”
If the word “and” had appeared after (b)(i) there would not have been an issue. Because the “and” was missing it was pointed out to HMRC that this could bring many businesses in a supply chain (including recruitment businesses and umbrella companies) into the off-payroll regime since they are in the chain and paying workers to do specific jobs. HMRC assured us that this was not the intention.
This week some commentators picked up on the drafting flaw and published articles warning against the use of umbrella companies unless tax was deducted before paying the umbrella company. This seemed counterintuitive to us since one of the benefits to agencies and contractors (and HMRC) of using umbrella companies is the assurance that the correct levels of tax are paid.
To be fair to HMRC, it acknowledged the flaws in the drafting explaining that it made to protect against certain “consultancy” arrangements that they had identified which tried to side step the material interest condition and directed us to its published guidance which says that it is not intended to apply to payments to umbrella companies. They have since released a statement confirming this position.
We now expect the off-payroll legislation to be tweaked before April to avoid any confusion in the future.
