Despite further attempts at delay, the final version of the notorious private sector IR35 rules are now enshrined in the Finance Act 2020, which received royal assent on 22 July 2020.
Under the IR35 rules, from April 2021 large and medium-sized businesses will be required to determine the status of any contractors providing their labour to the business through personal services companies (PSCs) or other intermediaries and, if appropriate, operate pay as you earn (PAYE) and make national insurance contributions (NICs).
The IR35 provisions in the Finance Act 2020 are substantially the same as the draft legislation and Her Majesty's Revenue and Customs guidance, except in one important respect. The Finance Act 2020 has widened the circumstances in which a contractor providing labour to an end user through a company could be within the scope of the IR35 rules.
Under the draft legislation, it was proposed that an end user would have to consider whether IR35 applied if the company through which a contractor was supplying their labour was an intermediary. Further, a company would be an intermediary only if it was a PSC – broadly, a company in which the contractor (either alone or with their associates) held more than 5% of the ordinary share capital.
Under the Finance Act 2020, the definition of a 'company intermediary' has been extended to include any company from which the contractor has received, or has the right to receive, a payment which can reasonably be taken to be a reward for the contractor's services to the end user.
This change will increase the number of situations in which end users should consider whether IR35 applies. In general, the end user will need to consider the IR35 rules where a contractor is supplying labour to the end user through a company, irrespective of whether the contractor has a shareholding in the company. However, there is a specific carve out from these rules where the contractor has contracted directly as an individual with a UK employment business (eg, an agency or umbrella company), provided that the agency or umbrella company is operating PAYE and NICs.
Businesses which have sought to eliminate PSCs from their labour supply chain to try to minimise their IR35 risk may need to reassess whether this approach still provides the best protection. Companies which have been asked to warrant that they are not intermediaries under the IR35 rules will generally be unable to provide that warranty. The focus should shift to ensuring that any supplied contractors are employees or treated as employees by a UK agency or umbrella company for all PAYE and NICs purposes. End users must do appropriate due diligence to check that this is the case.
The change in the definition of corporate 'intermediaries' was undoubtedly made to stop schemes designed to avoid IR35 by ensuring that the contractor and their associates hold no more than 5% of the share capital of the company through which the contractor provides labour. However, it is an unwelcome increase in the administrative burden on businesses at a time when they are having to deal with the implications of the COVID-19 pandemic.
