HMRC has announced its intention to resolve a recent amendment to the drafting of the Off-Payroll legislation that causes unintended consequences throughout the contractor supply chain.
The changes were first published on 11 March 2020 as the budget resolutions were published and then formally became law in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 in July 2020. There are now just six months ahead of the extension of the Off-Payroll Tax to the private sector, where the amendment to clause 61O broadens the definition of what the legislation defines as an ‘intermediary’
A technical report by IR35 Shield concluded that the amendment would classify any party directly remunerating ‘inside IR35’ contractors as an intermediary, meaning tax deductions under Pay As You Earn (PAYE) would have to be carried out prior to reaching this party.
The ramifications were widespread, including disruption to the use of umbrella companies, multi-agency supply chains, consulting firms and employees on secondment. This issues were highlighted in a recent ContractorCalculator summary of IR35 Shield’s research.
HMRC acknowledges Off-Payroll drafting error
Having discussed the changes with specialist legal and tax advisors, IR35 Shield presented a technical report to HMRC last month, defining the problem and outlining the practical repercussions of the drafting error.
Though the conclusions drawn were questioned by some commentators, an 2,500-word explanation published last week by law firm Osborne Clarke explained the impact of the amendment in precise detail.
Fortunately, the issue was taken seriously by HMRC who furthered their discussion with other industry stakeholders at a meeting, where strong representations were made calling for HMRC to urgently address the matter.
Acknowledging the unforeseen consequences of the drafting error today a statement from HMRC provided to ContractorCalculator stated: “HMRC is actively engaging with stakeholders on this issue and continues to work closely with them. HMRC is considering what action is required to ensure the off-payroll working rules apply as intended in order to provide certainty to those affected by the reform.”
Lack of ambiguity poses Off-Payroll problem
The onus is now on the taxman to act swiftly to resolve the issue which, uncharacteristically for the Off-Payroll legislation, is made more problematic by a lack of ambiguity in the actual drafting of the legislation.
Normally, where there is legislative ambiguity, those tasked with applying the law may consider reference to historical guidance, statements made by ministers, or Government guidance published after the event, among other sources.
Had this been the case with regards to the Off-Payroll amendment, HMRC theoretically could have offered clarity by publishing supplementary guidance. Indeed, the taxman offered a statement indicating that the statute was misaligned with intent, in response to coverage of IR35 Shield’s technical report.
However, following consultation with various legal experts, the report concluded that Chapter 10, clause 61O offered no room for uncertainty when applied in practice, necessitating further legislative change to correct the issue.
Parties urged to sit tight as Treasury addresses legislative blunder
The good news for those affected by this bizarre turn of events with the Off-Payroll legislation is that HMRC and the Treasury have accepted a resolution is needed and have indicated that one will be forthcoming. So, hiring firms and agencies needn’t worry about adjusting their supply chain structure to accommodate any unintended consequences.
However, as ContractorCalculator and IR35 Shield CEO Dave Chaplin notes, there are no guarantees that any further changes won’t cause further problems:
“Firstly, it is important to understand that laws are defined within the legislation, and not by HMRC guidance. It is now a case of waiting to see what specific legal amendments are proposed, and then determining what those mean.
This isn’t quite the simple territory some might believe. The fear is that it could fix one problem whilst creating another. It will take both time and the finest legal minds at the Treasury to make sure they get it right. We think they will, but we must all wait. Until then, firms are advised to sit tight, wait a few weeks and see how things progress.”
"Despite this one appearing to miss everyone's radar since March, thankfully it was caught now, and not weeks before April 6th 2021, otherwise it would have been too late."