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Clarification on Chapter 10's rule of unintended IR35 consequences
by Susie Hughes at 12:56 08/03/21 (News on IR35)
A problem of unintended consequences occurred with the new IR35 legislation when it appeared to also envelop recruitment agencies and umbrellas within its scope.
Employment law specialists, Lawspeed, and others took part in a mini consultation around this area - and the Government has now reconsidered the provisions.

At the same time, the Government has confirmed that the new private sector IR35 rules will be introduced in April 2021 without further delay.

Lawspeed writes:

Towards the end of last year HMRC noted that unintended consequences were likely to flow from changes to wording in Chapter 10 of the Finance Act (IR35 rules) around the requirement for a contractor to have a ‘material interest’ in the intermediary (typically a personal service company PSC)).

This followed comment from ourselves that all recruitment agencies supplying workers including PAYE workers would have to comply with the Chapter 10 rules if the wording was left as drafted, and additional issues were raised by others.

The result was a mini consultation with HMRC on a solution to address the issue, that we and other representatives from the sector participated in, and which concluded early in January. The next step was for HMRC to publish amended legislation and guidance. The legislation was published on 3rd March.

Material
In the original legislation from 2000 if the individual’s interest in the intermediary was not more than five per cent, described as a material interest, the arrangement was excluded from scope of the rules. The new amendment requires individuals who have a material or non material interest in the intermediary, to disclose that fact to a supplying business engaging with the intermediary, or to the hirer where the engagement is direct.

A qualifying non material interest includes one held by an associate of the individual or an associate of an associate, and exists where there is a holding of or rights to five per cent or less in shares and distributions or, in the case of a close company, assets, of the intermediary.

Accordingly, whereas in the original rules from 2000 those with five per cent or less interest in the intermediary were excluded from scope, now they are included.

This key component triggers application of the Chapter 10 processes. The result is that agency and umbrella companies supplying workers engaged directly under PAYE contracts, whether employment or personal contracts for services, are no longer affected so long as the worker has no interest in the agency or umbrella company.

HMRC has confirmed that the technical changes have been made 'to ensure the rules operate as intended from 6 April 2021'. Those challenging the Government’s plan to introduce the new rules will undoubtedly be disappointed.


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