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Dispelling the myths: IR35 & Umbrella

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You may have seen some commentary in publications and social media regarding Umbrellas being inadvertently affected by forthcoming IR35 legislation.

May we put your mind at rest. It does not mean Umbrella’s are impacted in anyway. It’s business as usual.

We have taken advice from John Chaplin at EY who assures us that however well meant the author(s) of these article(s) are…THEY ARE WRONG!

Below is the advice we’ve received:

“I can understand the view that people are forming, but I think that there is a degree of scaremongering occurring in certain quarters.  HMRC have already stated that it isn’t their intention to bypass umbrellas and that they will review the changes.  If they consider that the changes to legislation do have the consequences that some have said, I fully expect them to revise the legislation, but I’m far from convinced that any change will be required

If you have an umbrella operating in the way we all understand, they are the employer of the worker and have an employment relationship with the individual worker i.e. not with the PSC so the IR35 legislation is not and has never been in point as the base income tax legislation takes precedent.  IR35 only applies to payments that aren’t already employment income. 

Clearly, if an entity is simply acting as a payrolling supplier for the agency i.e. they are operating PAYE on behalf of that agency on payments still made to a PSC now caught by IR35 then, yes, the agency will still be liable for operating PAYE/NIC because the paying agent is acting under their instructions.  The agency has subcontracted paying the PSC to the “umbrella” but the agency will still remain liable as the “umbrella” is acting on their behalf.  However, this is not the typical umbrella model.

Put another way, EY will still be liable for PAYE on my salary even if they get a payroll bureau to operate PAYE as EY are my employer.  If my employment is instead with a service company, that company will be liable for PAYE even if they supply me back to EY to work.

My understanding is that these changes were made to capture some schemes aimed at bypassing the IR35 legislation and not to tax payments that have already been correctly taxed under PAYE.

So, no, umbrellas aren’t redundant if they are actually employing the individual as IR35 will not apply.  If they are merely paying a PSC on behalf of an agency (as opposed to providing their employees to the agency), the agency could still be liable for the PAYE, but I doubt that even then HMRC will take this issue as long as PAYE is properly accounted for.  The risk to an agency is and has always been in paying workers through a third party that aren’t compliant.  If a worker has an employment contract as an individual with the umbrella, IR35 is simply not in point.   Agencies might want to make checks to ensure that the umbrella is compliant and employing the worker to avoid any PAYE risk to them but nothing more than this would typically be required.”

We hope this clears up any misconceptions. However, we do have a more detailed/technical note that goes into more depth which we are happy to share with you should you wish.

Please call our account management team on 01244 564 564 for more information.

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