Out-Law / Your Daily Need-To-Know
UK companies do not yet have clarity on the rules governing off-payroll working despite recent guidance from tax authority HM Revenue and Customs (HMRC), an expert has said.
HMRC has published draft guidance on the IR35 off-payroll working rules as a series of short notes. Tax law expert Penny Simmons of Pinsent Masons, the law firm behind Out-Law, said: "With only seven months left until the changes to IR35 are introduced it is concerning that businesses are still unclear about the precise extent of their obligations under the new rules".
"HMRC had promised that 'extensive support' would be provided to ensure organisations are able to implement the off-payroll working rules. It is very disappointing that the draft guidance is so limited and for the most part simply repeats statements that have already been made," Simmons said.
IR35 rules require that employment taxes be paid by people who provide services through a personal service company (PSC) if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.
Once the new regime is in force, the engaging business, known as the client, will be liable for determining whether the IR35 rules apply and will also be required to operate PAYE and pay employers' National Insurance contributions (NICs). The changes will not apply to small businesses which engage contractors through PSCs. Off-payroll working rules have applied to the public sector since April 2017.
Businesses will be required to provide a statement determining the employment tax status of contractors working through PSCs directly to the contractor, including reasons for the determination, under draft legislation published by HMRC. Contractors will have the right to disagree with the determination through a new business-led status disagreement process.
Where a business engages with a PSC through an agency the agency will be required to operate PAYE and pay NICs if the client determines that IR35 applies. The client will be required to pass the status determination statement to both the agency and the contractor. If the agency fails to pay any PAYE or NICs due, the liability will pass back up the supply chain to the client. If a client does not exercise reasonable skill and care when making a status determination liability for paying any employment taxes will pass back to them.
"It is particularly concerning that the guidance does not include any information about how businesses can demonstrate that they have exercised reasonable care when making status determinations, despite HMRC previously confirming that they would clarify the steps that they expect businesses to make to demonstrate this," said Simmons.
"The guidance confirms that a status determination statement will need to be made for every contract where an individual provides services through a PSC; however, there is no information about when group determinations might be possible, notwithstanding previous assurance from HMRC that they can be appropriate in some circumstances," Simmons said.
In complex supply chains there may be a number of contracting parties between the client and the worker operating through the PSC. If the client makes a status determination statement that IR35 applies to a contractor, that statement should be passed down the supply chain to the party that contractors directly with the contractor's PSC. That party becomes the 'fee payer' and is responsible for operating PAYE and paying NICs.
"Clients and their agencies are particularly concerned by proposals to pass liability back up the supply chain if a party further down the chain fails to pay any employment taxes that are due," said Simmons. "It is very disappointing that the guidance fails to explain the circumstances when this might happen. HMRC has previously confirmed that this is only intended in cases of non-compliance, however there is no mention of this risk in the guidance for clients and the guidance for agencies simply confirms that liability may transfer back to them if HMRC 'cannot collect any outstanding tax or NICs' from parties below them in the chain."
"Hopefully the 'extensive support' that HMRC has promised will follow shortly, otherwise businesses with complex supply chains and large flexible workforces will struggle to meet the April 2020 deadline when the reforms are being introduced," Simmons said.
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