Out-Law / Your Daily Need-To-Know

No exception for failing businesses in off-payroll working regs

Out-Law News | 24 Jan 2020 | 12:53 pm | 2 min. read

Draft regulations published by the UK government do not make an exception for failing businesses when allocating liability for employment taxes under new off-payroll working rules.

The omission in the regulations imposing secondary liability on the engager when an agency fails to pay employment taxes is "disappointing" according to Penny Simmons, a tax expert at Pinsent Masons, the law firm behind Out-law.

“It is reassuring that the technical note accompanying the draft regulations confirms that HMRC will not exercise their power to recover unpaid employment taxes from the client where there has been a genuine business failure. However, it is disappointing that the draft regulations make no mention of this restriction," Penny Simmons said.

From 6 April 2020, engaging businesses will be made liable for determining whether the IR35 off-payroll working rules apply where they engage workers through personal service companies (PSCs). They will be required to operate PAYE and pay employers' National Insurance contributions (NICs) where the individual would have been an employee if engaged directly.

Where an engager is using an agency to source and manage workers, the rules make the agency liable for accounting for employment taxes to HM Revenue & Customs (HMRC), albeit based on a status determination made by the engager. However, the rules also provide that liability will transfer back to the first party or agency in the chain where a party ceases to exist or is otherwise unable to pay.

The draft legislation, which is due to form part of this year's Finance Bill,  states that regulations may make provision authorising recovery of an amount “that an officer of Revenue and Customs considers another person should have paid under PAYE regulations in respect of a deemed direct payment”.

HMRC has now published draft regulations and a technical note which clarify when the secondary liability rules will apply. The regulations also include provisions setting out the requirements for the contents of the recovery notice to be used in these circumstances and appropriate appeal rights in relation to the provisions.

HMRC will first seek to recover any unpaid tax liabilities from the agency the client contracts with, where this agency is UK-based. This is agency one in the labour supply chain. Where HMRC thinks there is no realistic prospect of recovering the outstanding income tax from agency one, HMRC will then seek to recover unpaid liabilities from the engaging business.

The government said in July 2019 in its response to a consultation on the new rules that “the proposals are not intended to transfer liabilities in cases of genuine business failure, where deliberate tax avoidance has not occurred”.

"The technical note makes no comment on the need for there to be deliberate tax avoidance for this power to be invoked and it is also unclear what HMRC will consider to be a situation where there is 'no realistic prospect of recovery'," Simmons said.

"It is hoped that further clarification will be provided in the guidance that has been promised by HMRC; however, with just over two months until the new rules commence, it is unsatisfactory that such an important aspect of the rules remains unclear," she said.

The off-payroll working rules, known as IR35, 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. The changes being introduced in April will not apply to small businesses which engage contractors through PSCs. The public sector is already obliged to decide whether IR35 applies when it uses off-payroll workers.

Earlier this month, the government announced a review of the implementation of changes to the off-payroll working rules.

"The publication of the draft regulations and technical note also provides yet another indication that delay beyond April 2020 is unlikely, despite the government’s ongoing review of the rules,” Simmons said.