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 is expected to be published this summer. In preparation for this, HMRC recently (on 5 March 2019) published a policy paper and consultation document which sets out the proposed operation of the new regime and seeks input from stakeholders.
A link to the consultation can be found here, and the closing date for comments is 28 May 2019.
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. We are also concerned that there could be circumstances where it is uncertain which person in a labour chain will ultimately be liable to account for employment taxes.
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 (and, if requested, 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 (i) the person who would be liable to operate PAYE in the normal course (i.e. a fee payer who has received a status determination or a person in the chain who received a status determination, but failed to pass it on) fails to do so, and (ii) HMRC is unable to collect the outstanding liability from that person (e.g. because such person has ceased to exist), the liability would transfer back to the first agency in the chain (being the person with whom the end client contracts to secure the labour). If there is no such first agency, or HMRC are unable to collect the outstanding liability from that first agency, the liability would shift to the end client.
- 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 consultation states that end clients should put processes in place to deal with any such disagreements, and that such processes should be “client led” – in other words be the end client’s problem.
- In that regard, the consultation (unhelpfully in our view) remarks that “public sector and medium/large-sized private sector organisations are likely to already have relatively sophisticated HR processes in place either in-house or sub-contracted to relevant service providers for managing workplace disputes.” Clearly, this notion is fanciful 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.