Workforce Solutions

Spring Budget 2021 | Further changes to new IR35 legislation announced against backdrop of other compliance developments

Published on 4th Mar 2021


Important changes to the new IR35 regime were announced in the Budget (3 March 2021). These include correction of an error in the 2020 Finance Act that affected users of CIS and other sole traders, umbrella and PAYE workers, a rule to target IR35 avoidance, further obligations for intermediaries, and updated "fraudulent documentation" measures. Meanwhile, in addition to the Budget announcements, there have been developments in relation to how companies have been planning for the new IR35 regime including use of insurance-backed checking services, use of umbrella companies, and the impact on M&A planning.

Budget measures

  • As stated by HMRC in November, the error in the 2020 Finance Act (which enacted the new IR35 regime) will be corrected so that umbrella and PAYE workers are not also caught by IR35. Instead it appears that the legislation will only apply to supplies of workers where: (i) PAYE and NICs are not applied in full and (ii) the worker has any interest in the intermediary via which they are supplied. The latter condition extends the scope of IR35, which had previously only applied where there was an effective shareholding of more than 5% in the intermediary.
  • A Targeted Anti-Avoidance Rule (TAAR) will target any arrangements where the main purpose, or one of the main purposes, is to gain a tax advantage by taking the engagement outside IR35. Effectively this means that, if companies are using models that happen to fall outside IR35 (such as certain types of statement of work (SOW) arrangement), they will need to be able to demonstrate that the arrangement is something they would be doing anyway for good commercial reasons. We have certainly seen SOW models and the like adopted for good commercial reasons. Models, which are, however, a pure workaround to circumvent IR35, may be caught.
  • Intermediaries will be obliged to confirm to persons in the supply chain whether IR35 qualifying conditions are met (in terms of what the worker has been paid). At the moment, only the contractor has that obligation.
  • If anyone in the supply chain provides fraudulent documentation relating to IR35 status and related payments then they may be liable under IR35 (which may get others in the chain who have relied on that documentation off the hook). Previously, the "fraudulent documentation" get out only applied if the contractor him or herself provided that documentation.

The detail of these measures should be available on 11 March when the Finance Bill is published.

Insurance-backed IR35 checking services

Meanwhile, we continue to see insurance-backed IR35 checking services used by staffing companies and end users. As we have previously indicated, if these are not structured correctly, there are potentially material risks for staffing companies and end users under the 2006 managed services companies (MSC) tax legislation. That legislation focuses on whether people are effectively enabling contractors to operate via personal service companies. Provision of tax insurance to organisations in the contract chain is one of the things specified in the legislation as potentially triggering liability.

We recommend that any organisation seeking to use these services takes legal advice on the potential impact of the MSC legislation and, in particular, sections 61 B and C of ITEPA (the Income Tax (Earnings and Pensions) Act), and structure their use of external checking services carefully to minimise this risk.

Use of umbrella companies 

Many are looking to use umbrella companies to payroll the contractors who "fail" IR35. All should remember that HMRC expects users of intermediaries like umbrellas to do full checks on them Supply chain due diligence principles - GOV.UK ( and has issued a number of alerts about tax avoidance schemes operated by certain (but by no means all) umbrellas.

In addition, the Criminal Finances Act (CFA) effectively requires staffing companies to spot-check evidence of how and where, in the case of any umbrella via whom a significant number of workers are engaged, the workers are paid. As a result of the changes to IR35, some end users are now dealing with umbrella companies direct, so they will also need to review their CFA policies to ensure that they are carrying out similar checks. We believe well-established umbrella companies will be happy to co-operate with this.

Impact on M&A plans

We believe evidence of compliance with TAAR requirements, correct structuring of third-party checking services and spot-checks on payments via umbrellas will become increasingly important issues in due diligence exercises carried out by investors in M&A and funding deals involving staffing and consultancy companies. IR35 issues, and what companies are doing to deal with it, are coming up a lot in current deals on which we are advising.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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