As confirmed by the 2018 UK Autumn Budget, the off-payroll taxation rules (commonly referred to as IR35) for the private sector and the public sector will be aligned, with effect from April 2020.
This reform will introduce significant changes for private sector arrangements where an individual is engaged through a personal service company (PSC). In particular, there will be a shift of responsibility for ensuring that the correct amounts of payroll taxes (income tax and National Insurance contributions) are paid and accounted for to HM Revenue & Customs (HMRC), from the PSC to the end client (or, where the labour chain includes persons, such as agencies, between the end user and the PSC, to the UK resident person closest to the PSC in the chain).
Draft legislation to implement those changes has recently been published, together with an updated HMRC policy paper, explanatory notes and HMRC’s responses to their previous consultation on the proposed operation of the new regime.
A link to the draft legislation and supporting documents can be found here.
Our main comment is that the new regime, as currently proposed, could make it considerably more onerous for businesses to engage a consultant through a PSC, in particular where agencies are involved in the labour chain and the end client does not contract directly with the PSC. End clients and agencies alike should consider how they will be affected by the new rules and take steps to minimise their exposure as far as possible through appropriate contractual arrangements.
The changes and considerations that will be relevant for businesses that wish to continue engaging consultants through PSCs after April 2020 include the following (please note that this list is not exhaustive):
- There will be a new requirement for end clients to make a status determination as to whether, if the individual were engaged directly rather than through a PSC, the relationship would (from a tax perspective) be treated as an employment. The end client will then be required to ensure that the status determination, including the reasons for it, is passed down the labour chain, as well as provided directly to the individual off-payroll worker.
- Where there is no chain (i.e. the end client contracts directly with the individual’s PSC) and the status determination requires the individual to be treated as an employee for tax purposes, the end client will be required to operate PAYE and account for employment taxes to HMRC.
- Where there is a labour chain (i.e. there are persons, such as agencies, in the contractual chain between the end client and the PSC), the obligation (if any) to operate PAYE would fall on the person who contracts with (and therefore makes payments to) the PSC (referred to in the consultation as the “fee payer”). If the person who contracts with the PSC is not resident in the UK, the UK resident person closest to the PSC in the chain would be the fee payer.
- Importantly, the obligation on the fee payer to operate PAYE is subject to compliance with the information requirements by the persons higher up the chain. Essentially, it is envisaged that the obligation to operate PAYE would move down the chain with the status determination, until it reaches the fee payer. Where a person in the chain fails to pass a status determination down the chain, that person would instead become liable for unpaid employment taxes.
- However, even full compliance with the information requirements by a person in the chain (other than the fee payer) may not eliminate the risk of liability for such person. If there is a compliance failure with the result that HMRC is unable to collect the outstanding liability from the person treated as the fee payer (e.g. because such person has ceased to exist), HMRC may seek to recover the outstanding tax from the first agency in the chain if there is one (being the person, if any, with whom the end client contracts to secure the labour) or, failing that, from the end client. HMRC appears to recognise (in its responses to the consultation) that this may not be fair in all circumstances and promises clear guidance on the circumstances in which it will not seek unpaid liabilities from parties further up the labour supply chain. As this will be of limited comfort to agencies and end clients, we would recommend that (to the extent possible) this exposure is covered in the contractual arrangements between the parties.
- With regard to making a status determination, end clients will be required to consider all relevant factors (rather than taking a blanket approach) and give reasons for their decision if requested. Clearly, there is potential for disagreements between end clients and fee payers or off-payroll workers. The draft legislation confirms that any disagreement process should be “client led” – in other words this will be the end client’s problem and has the potential to turn into a big headache for HR departments.
Please note that this alert has been prepared as a service to clients and other friends of Jurit LLP to report on recent developments that may be of interest to them. The information in it is therefore general, and should not be considered or relied on as legal advice.