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New clauses undermine umbrella company model for avoiding IR35
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IR35: Umbrella companies won’t keep out the rain

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David Kirk explains why the standard umbrella company model will not work under the off-payroll rules from 6 April 2021, due to a last minute change in the law.

8th Oct 2020
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Do you remember the game scissors, paper, stone, which has no winner because of its circular nature? The world of IR35 seems to have descended to something like this, thanks to the discovery of a late addition to Finance Bill 2020 as it was going through Parliament.

Like all unannounced changes, it has not been thought through and has unintended consequences which merit a closer look. HMRC described the new addition as one of a number of “incidental changes and corrections to ensure the legislation applies as intended”.

Unfortunately, it goes quite a lot further, with consequences that umbrella companies are going to need to think carefully about because, on the face of it, the standard umbrella model will no longer work from 6 April 2021.

The problem revolves around an obscure clause in ITEPA 2003 chapter 10 that deals with public sector IR35 cases (also called off-payroll) – that tells you what sort of arrangements it applies to.

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Replies (11)

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By memyself-eye
08th Oct 2020 11:16

..and I thought the chain was a Fleetwood Mac song.

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Replying to memyself-eye:
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By bendybod
09th Oct 2020 10:39

The only similarity being that they are both long. The song is quality. The legislation is not.

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By Donald MacKenzie
09th Oct 2020 10:54

Simple solution
Workers and companies stop trying to wriggle out of paying the taxes they are due to pay.
We all know the contrived umbrella schemes are only there to reduce tax/NI and reduce the cost to the ultimate employer or increase the money net of taxes to the end worker.
If it looks like a duck, walks like a duck and sounds like a duck, it's a duck.
No reason not to use agency workers to bring in staff as needed. Just pay them properly, without trying to pretend they are not employed.

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By dmmarler
09th Oct 2020 12:08

Wouldn't it be easier to dispense with NI? That is really what this is all about - trying to get everyone to pay NI ers & ees rather than take the dividend route. Our Chancellor should grab the opportunity of all the Covid confusion to get rid of this time-wasting tax and combine it with income tax and stop taxing employers for creating jobs. There will great opportunities for cost saving (civil servants, their pensions, estates, IT, etc.) and there will be no prior year comparatives ...

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By Arcadia
09th Oct 2020 12:34

I used to think the same - NI is just tax, so why not combine it with income tax? The reason the Chancellor won't do it is that the population at large don't see NI as a tax, and are therefore more willing to pay it, and more willing to accept increases in it. People think NI 'pays for' pensions, benefits and the NHS. I think there is a body of thought that the care crisis will be 'paid for' with an increase in NI, and so they will not get rid of NI.

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Replying to Arcadia:
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By memyself-eye
09th Oct 2020 17:18

This is true - NI is the tax that dare not mention its' name. Wait till folks discover it's nowt to do with pensions after all....

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Replying to memyself-eye:
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By dmmarler
12th Oct 2020 14:21

Taxpayers are not that daft to think NI pays for pensions, NHS, etc. They are perfectly clear taxes are not hypothecated, it is only politicians who tie themselves in knots over what is a tax so they get the right sound bite.

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By Ianmcgahey
14th Oct 2020 00:40

Seems strange why this would apply if the Umbrella was operating PAYE on the payment from the agency? Why push the tax deduction to the agency?

Typical confusing legislation from HMRC.

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Replying to Ianmcgahey:
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By David Kirk
09th Oct 2020 18:07

The IR35 legislation will apply, because the law says so - one has to read the actual law. This is doubtless unintended. Currently it doesn't apply to umbrellas, but the whole point about this unfortunate change as that from April 2021 it will do - it will treat them in just the same way as PSCs. It moves the payment on which the PAYE deduction is made from the one from the umbrella to the worker, to the one from the agency to the umbrella, which is quite a bit bigger.

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Replying to davidkirk:
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By Ianmcgahey
14th Oct 2020 00:42

Hopefully this will be clarified by HMRC.

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By PeterForest
19th Oct 2020 14:48

I know that this legislation is more than likely to be changed. However would it help if the employer costs are back calculated and if these together with margin are detailed on the invoice from Umbrella to Agency. The employee will therefore be invoiced at net rate which will equate to their gross pay. If the Agency is to come more accountable regarding PAYE this could be accommodated through additional reporting provided by the Umbrella.

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