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IR35: Agencies in trouble too

David Kirk has further bad news for agencies that stand between the client and the worker in off-payroll chains from April 2021.

14th Oct 2020
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UPDATE 15 OCTOBER: In a twist to the story, HMRC has acknowledged the problems that stand between the client and the worker in the off payroll chains from April next year.  

HMRC officials met with key stakeholders including the Freelancer and Contractor Services Association (FCSA) on 14 October to discuss the recent issues emerging out of off-payroll reforms.

The FCSA reported that the meeting was “very positive and constructive” and that HMRC accepted that there is a clear problem with the legislation as it currently stands, especially around the definition of intermediaries, and that the intention of the reforms was not to stop compliant umbrella companies from operating as it does today.  

The FCSA expects the issue to be addressed in the primary legislation via the Finance Bill.

HMRC also responded to the concerns regarding the wording of section 61O of Chapter 10 ITEPA. It confirmed that the off -payroll working rules should apply to situations "where there is no employment or agency worker relationship between the worker and the client or an agency or other third party in the labour supply chain, and the worker’s services are provided through their own intermediary”.

The guidance continued, “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.”

In a statement, an HMRC spokesperson said: “We have engaged with stakeholders to understand their concerns about part of the off-payroll working legislation and reassure them that the policy intention remains in line with our published guidance.”

“We continue to work closely with stakeholders on this issue and are considering what action is required to ensure the rules apply as intended.”

Below David Kirk explains the issue and what the drafting blunder means for the traditional umbrella companies if the legislation doesn't change.

* * *

Last week I showed how a drafting blunder in FA 2020 will up-end the traditional umbrella model when the new IR35 rules come in from 6 April 2021. Since that article was published, HMRC has contacted AccountingWEB and other stakeholders to assure them that its intention was not was not to stop compliant umbrella companies operating as they currently do. This analysis was published before that response and considers the potential impact for intermediary agencies caught by the draft clauses.

Agencies must worry

In fact it transpires that agencies are going to have a good deal more to worry about than PAYE liabilities on payments to umbrellas if the Finance Act clauses are enacted as currently written. Suppose there is no umbrella in the chain – what happens then?

Take a very simple chain:

Client > agency > worker

Typically, the contract between the agency and the worker will not be a contract of employment, so under current rules PAYE will only be deductible if the supervision, direction or control (SDC) test applies. This is generally narrower than the employment status test, as it only looks at control over how the work is done, not control over what is done.

Rules from 6 April 2021

Agencies must consider whether the new ITEPA 2003 chapter 10 rules also apply. As I explained in myprevious article about umbrella companies, this could easily happen where there is control over the ‘what’ but not over the ‘how’.

If the new chapter 10 rules do apply, then the agency will be the intermediary and the client the fee-payer, and PAYE will be deductible on the payment from the client to the agency. This will often be more than 25% higher than the payment from the agency to the worker, to take account of the agency margin and employer’s NICs.

Agency exemption?

The shift of PAYE burden will also be the case where there is an exemption from the agency rules: they are specifically stated not to apply to ‘services as an actor, singer, musician or other entertainer or as a fashion, photographic or artist’s model, or services provided wholly in the worker’s own home, or at premises which are neither controlled nor managed by the client nor prescribed by the nature of the services’.

So that includes home workers. It might be considered a cheap shot to point out that there are rather a lot of these at the moment, what with Covid restrictions and all that.

The position with entertainers and models matters for a different reason: their agencies are allowed to charge them fees, and if they can maintain their self-employed status these fees can be deducted for tax automatically.  If not, they will need to rely on s. 352 ITEPA, which makes them allowable for actors, dancers, musicians, singers and theatrical artists. Nothing for models then, and there may be other gaps in the wording as it is not quite the same.


This new wording in ITEPA 2003 chapter 10 will also affect secondments, which are big business for big business.

Suppose Megafirm (perhaps one of the Big Four accountancy practices) seconds an accountant to Megacorp (a client). While on secondment the accountant will remain an employee of Megafirm even though they are working for Megacorp.

Once again the double tax charge mentioned in my last article comes into play, and s. 61W ITEPA settles the matter by making it clear that it is the payment from Megacorp to Megafirm that is subject to tax and not the payment from Megafirm to the accountant.

Unintended consequences

I have no doubt that this change in ITEPA 2003 is unintentional and I expect the law to be changed in time for the off-payroll rules to commence in April 2021.

Regrettably it is the inevitable result of having legislation that is too complicated for anyone to understand fully, and that is not consulted on before it is passed.  An announcement from HMRC as to what it intends to do is urgently required.


Replies (3)

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By Sypies
16th Oct 2020 07:18
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By David Kirk
16th Oct 2020 08:58

Thanks but that doesn't alter my point: the legislation is going to need changing to bring it in line with HMRC's intentions and it looks as though they acknowledge that. Also their statement does not cover the position on agencies which this partiuclar article was about - only umbrellas.

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By Mr J Andrews
16th Oct 2020 15:02

Generally , if legislation needs to be amended to comply with the intentions of HMRC ,then it's time to kiss the system Goodbye

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