Off Payroll Working Rules/IR35: draft regulations published
From April 2020, medium and large private sector companies who engage contractors via personal service companies (“PSCs”) will be subject to new obligations (the “Off… Read more
From April 2020, medium and large private sector companies who engage contractors via personal service companies (“PSCs”) will be subject to new obligations (the “Off Payroll Working”/IR35 rules). For more information about the rules, see our past blogs and podcast here. On 11 July the government published draft regulations and a response following its consultation exercise on the new rules.
Under the reform, if a contractor is engaged via a PSC by a medium or large company, the recipient of the contractor’s services (the “Client”) must make a determination of whether that contractor is a deemed employee for tax purposes (a “status determination”). If the contractor is deemed to be an employee for tax purposes, then the last entity in the chain before the PSC (the “fee-payer”) must operate PAYE and be liable for employer’s national insurance contributions on the fee paid to the contractor.
There are some positive points arising from the draft regulations and response to the consultation exercise, for companies engaging contractors in this manner:
- Confidential commercial relationships will be protected by requiring the Client only to pass status determinations (and accompanying reasons) to the next entity in the labour supply chain and the contractor themselves, thereby minimising the risk of solicitation or elimination of other entities in the supply chain.
- Clients and the “first agency” in any chain will not be liable in the event that another entity further down the chain suffers a “genuine business failure” and the Client / first agency can demonstrate that they used “reasonable care” when engaging the supply chain. Further guidance will be published by HMRC on how Clients and first agencies can demonstrate that they have exercised reasonable care.
- HMRC is working to improve the “Check Employment Status for Tax” (“CEST”) test and “expects to make the [improved] service available before the reform is implemented” (although precise timing is not specified).
- HMRC has stated that it will not carry out “targeted” campaigns regarding compliance in previous years, when individuals are deemed employees for tax purposes following the introduction of the reforms (although this is no guarantee that compliance and enforcement action will not be taken against the contractor/their PSC in respect of previous years).
However, the government has also laid the burden of compliance squarely on the shoulders of the Client and the first agency in any labour supply chain, by:
- Placing the PAYE and NICs liabilities with the party in the supply chain who has failed their obligations but then moving those liabilities to the first agency in the supply chain if the initial party still does not comply.
- If the first agency in the supply chain also does not comply, then liability would move to the Client.
- This will require both Clients and the first agency in any labour supply chain to undertaken due diligence on the entire supply chain to ensure compliance. HMRC will provide guidance on the circumstances in which it will seek unpaid liabilities from parties further up the labour supply chain and steps the parties can take to help ensure adequate due diligence.
- In the event of a dispute regarding a status determination, the fee-payer or the contractor may make representations to the Client and the Client must respond to those representations, otherwise it will be liable for the tax and NICs. HMRC will provide further guidance for Clients on implementing this “status disagreement process”.
The key take-away is that due diligence on the supply chain parties and their compliance, together with strong commercial protections, will be key to ensuring that liability does not transfer back onto the Client or first agency in any supply chain. It is not enough for Clients or first agencies to ensure they are compliant themselves.
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