Final changes to the IR35 (Off-Payroll) legislation contain an errant clause which has redefined intermediaries and now appears to make the use of payment intermediaries redundant, according to compliance solution provider IR35 Shield.

The legislative issue and the extent of its repercussions were documented in a technical paper by IR35 Shield, which its CEO and founder Dave Chaplin shared with HMRC as well as specialist tax and legal advisors.

New changes introduced to Chapter 10 of the Income Tax Act 2003 via The Finance Act 2020 which reached Royal Assent on 22 July 2020 broadens the definition of an ‘intermediary’ to include any company which makes a ‘chain payment’ to a worker.

The legislation requires that payment is treated for employment tax purposes before reaching the intermediary. This means the agency needs to process the tax deductions, effectively rendering the role of the umbrella company redundant. This poses numerous challenges for the entire supply chain, IR35 Shield states.

The consequences hinge on what would appear to be an innocuous amendment to section 61O of the Finance Act and how it defines an intermediary. But the change means that from April 2021 an umbrella company is an intermediary and the agency is therefore a ‘fee-payer’.

Chaplin said, “It is hard to believe, without any announcement, that legislators have decided that agencies should be responsible for all tax deductions, thereby removing payment intermediaries from the supply chain. The industry has pivoted before and will do so again but, with just six months to go before the legislation takes effect, the supply chain needs clarity and certainty as a matter of urgency.”