Autumn Budget 2024: What Contractors and SMEs need to know
On October 30th, 2024, Chancellor Rachel Reeves announced her Autumn Budget, setting out a path for a “decade of national…
Kingsbridge learns that framing ‘umbrella company’ too narrowly could lead to loopholes, whereas too widely may trigger a ‘pick and choose’ taxman.
New “Joint and Several Liability” legislation against umbrella companies could hand HMRC a new way to boost its IR35/off-payroll working yield, Kingsbridge understands.
An IR35 insurer, they’ve learnt HMRC may probe a supply chain via the new legislation, set for a new chapter of Part 2 ITEPA (2003), only to switch focus by applying Chapters 8/10.
The umbrella company Joint and Several Liability (JSL) legislation isn’t due to come into force until April 2026.
‘L-Day’
And its draft wording is being kept under wraps until “L-Day” (Legislation Day), expected mid-July 2025.
Broadly, though, the legislation will make recruitment agencies using umbrellas liable for any tax HMRC says is owed by their umbrella companies but is unpaid.
‘Absolute liability’
No statutory excuse, such as taking “reasonable care” à la Chapter 10, will be available, meaning there will be “absolute liability”.
Where the supply chain is without an agency, it will be the end client (for whom the umbrella employee works) that is liable for the umbrella company’s tax shortfall.
‘More than one tax regime may apply’
However, it may be “very difficult” to set a new umbrella tax regime which narrowly defines ‘umbrella company’ “without creating loopholes”, says Osborne Clarke.
On the other hand, a “very wide” definition risks the scenario where “more than one regime may apply to a particular situation”, adds the law firm.
“Or the scenario where HMRC chooses to apply a regime which, on the face of it, is not…[seen by the parties as] relevant to that particular supply.”
‘Joint and Several Liability is umbrella legislation’s new direction of travel’
Kingsbridge has now pressed Osborne Clarke about its alert-led analysis, which it published after HMRC used a June 12th stakeholder meeting to say ‘JSL’ is the umbrella legislation’s new “direction of travel”.
Frances Lewis at Osborne Clarke, where she specialises in legal matters affecting the contingent workforce, clarified in a statement to Kingsbridge:
‘Revenue could choose which ITEPA chapter to apply’
“HMRC could argue that the wording of some of the chapters could allow it to say ‘Chapter X rather than – the perhaps more obvious – Chapter Y’ applies.
“And then, based on factors which may…include whether it is the easiest route to get money into the exchequer, [HMRC could] choose which Chapter to apply”.
Lewis acknowledged that a court would first need to decide “whether and when” to permit HMRC to take such an approach.
‘Confusion over which tax regime will apply’
Nevertheless, she says the umbrella company legislation “will have to very clearly set out when…[it] does and does not apply to avoid confusion about which tax regime will apply to any given situation”.
The analysis was echoed by Osborne Clarke partner Kevin Barrow, who, after HMRC last week said the draft legislation would require an entirely new chapter in the Income Tax (Earnings & Pensions) Act, said:
‘HMRC to pick a supply chain entity, then choose best tax regime to attack it with’
“We can see a situation where HMRC starts treating ITEPA like a sweet shop.
“It will see some unpaid tax and look at the supply chain and decide which entity it would most like to assess in that chain.
“And it could then pick the tax regime which allows it to attack that entity.”
However, it won’t just be the tax authority potentially looking at its options when the umbrella legislation bites in just 41 weeks’ time.
‘Reframe commercial models around least onerous tax regime’
Osborne Clarke’s Ms Lewes, who has over 25 years’ experience advising on contingent workforce issues, explains:
“[We anticipate that] there will certainly be a good look by many [entities] at what the best contractual supply model will be…going forward.
“Models which attract the least onerous tax regime for a particular type of entity – depending on where it sits in the supply chain – are likely to become more popular. Many [companies] may reframe their commercial models to cater for that.”
‘Off-Payroll Working rules forced 100,000 contractors into umbrellas’
Therefore, supply chain arrangements may flex as early as the middle of next month, once the draft wording is unveiled, according to Kingsbridge’s Ryan Dawson.
“I’m not alone in an eagerness to see what the rules for umbrellas – which the Off-Payroll Working (OPW) rules indirectly forced 100k contractors into – are actually going to state.
“On L-Day next month, it won’t just be IR35 insurers like us hoping to see careful drafting and precise definitions, of course.
“But both are key if unintended consequences, which we still see today with the 2017 and 2021 OPW rules, are to be avoided in this bid to put umbrellas under new tax legislation.”
‘K5K Ltd case shows HMRC has form on flitting between tax regimes’
Dawson says Osborne Clarke’s ‘sweet shop’ analogy (i.e. that HMRC may take a ‘pick and choose’ approach to tax regime application), may not need to rely on loose wording to come to fruition, as a 2022 judgment set a precedent.
The IR35 Project Manager advised yesterday: “In K5K Ltd v HMRC, HMRC was able to successfully challenge the employment status of workers supplied via an agency, even when it was argued they operated via Personal Service Companies (PSCs).
“In the K5K case from 2022, HMRC had the ability to use ITEPA Chapter 8 (IR35) and Chapter 10 (OPW).
“But in the end, HMRC deemed it more efficient and effective to rely on Chapter 7. It was partly due to the restricted number of employment status indicators that needed to be considered.”
‘Sloppy drafting’
Last night, one adviser who refused to be named said it was a stretch to suggest “sloppy” drafting by the government on umbrella company rules could catch PSCs.
Adrian Marlowe, chair of the Association of Recruitment Consultancies (ARC), agrees.
‘IR35 rules applying…’
“Under agency tax legislation – that’s Section 44-46 ITEPA – agencies are liable for PAYE and NICs of their supplied workers as deemed employees unless they are not providing personal services subject to control…or unless they are being paid as employees by a third party…”, Mr Marlowe began.
“IR35 applies to PSCs. But will never apply to an umbrella company unless the worker has an interest in the umbrella.
“And that doesn’t ever happen, but if it did, it would result in IR35 rules applying to the particular supply of the worker who has the interest.”
‘Not coherent to say HMRC could pick and choose’
Also the founding lawyer at Lawspeed, an advisory specialising in recruitment law, Mr Marlowe further told Kingsbridge:
“Speculation that the legislation may allow HMRC to ‘pick and choose’ which tax rules it applies is not coherent – unless the new definition of ‘umbrella company’ somehow means that PSCs are affected, which is very unlikely.”
A tax lawyer who was in the room when HMRC agreed last Thursday to JSL in the umbrella company legislation isn’t so sure ‘pick and choose’ is such a slim prospect.
‘Chapter interactions of ITEPA’
“[Due to your question on behalf of Kingsbridge] I have asked [officials] for an update on this”, says the lawyer, Rebbeca Seeley Harris.
“It was a question that’s been raised generally at the Employment Status & Intermediaries Forum. And HMRC was looking into the Chapter interactions of ITEPA in 2024 [as well].”
‘Wholesale review of the labour supply chain needed’
The owner of Re Legal Consulting, Seeley Harris warned: “HMRC is very well aware of the potential interactions with other pieces of legislation in Off-Payroll Working and s.44 ITEPA.”
The tax lawyer added that she wants Labour to announce a “wholesale review of the labour supply chain and its functionality, particularly from a legislative standpoint”.
“It is a minefield for companies to navigate in order to be compliant”, she says. “And under [the mooted] JSL [rules for umbrellas], agencies will have to be even more mindful of compliance.”
‘Devil of umbrella company legislation already known for agencies; only the detail is pending’
Talk of making their ventures liable for non-compliant umbrellas’ tax debts will “of course” be giving recruiters sleepless nights already, even if JSL won’t potentially be formally approved until mid-July, hints ARC.
And at Kingsbridge, Mr Dawson sympathised with the IR35 protection firm’s agency partners.
“Umbrella companies will feel a sense of relief that the latest iteration of the HMRC legislation is said to confirm they’ll keep their Employer Reference Number, but for agencies, the ‘devil’ – liability – is already known, even if we’re all still waiting on the ‘detail.’
“That said, where an agency has satisfied itself that the correct tax has been paid [by the umbrella], any risk should, in theory, be reduced.”
‘Vested interest’
Almost sounding an appeal to policymakers – that should serve as a warning to supply chain entities too – Dawson says:
“We right now need a taxman who’s clear and concise in the terms and intent of the JSL umbrella tax legislation.
“That’s even though with the yields from his rules never being as high as he wants, the same taxman invariably has a vested interest in keeping the impact of the floated ‘joint and several liability’ between the umbrella and the agency (or client) and interaction with already in-force legislation hazy, or at the very least open to his interpretation.”
Getting support
Navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. Kingsbridge offers tailored support, including expert guidance on IR35 status assessments, compliance strategies, and risk mitigation. Their team is dedicated to helping contractors and businesses understand and adapt to the evolving tax landscape.
They also offer a range of flexible business insurance options to support contractors, including Professional Indemnity, Public Liability, and Employers’ Liability cover, as well as add-ons like Cyber Insurance and Director and Officer’s Liability.
To find out more, get a quote or contact their experts today.
Simon Moore, Managing Director at Moore News Ltd
Simon Moore is a journalist with NCTJ-approved journalism training, who has worked inside the newsrooms of local, consumer and national media titles.
He today writes news and features for trade publications specialising in freelancing, small business and the self-employed. Simon’s articles have been linked to by The Daily Telegraph and the biggest newspaper website in the world, MailOnline. He was appointed to be a judge at IPSE Freelancer’s Awards 2023.
