Off-payroll working rules: secondary liability rule too wide

The Law Society, in its own response to the government's consultation on extending the off-payroll tax rules to the private sector, said that the secondary liability rule was "neither satisfactory nor in accordance with the government’s response" to an earlier consultation on the changes.

Tax rules known as IR35 require that employment taxes be paid where a person provides 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, responsibility for deciding whether IR35 applies and to pay any employment taxes rests with the PSC. From April 2020, once a new regime is in force, the engaging business 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).

However, an engager may be using an agency to source and mange workers. In this situation the regulations 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 regulations 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.

A provision in the draft legislation 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”.

The government said 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”.

It said that the draft legislation would set out conditions under which the liability may be transferred to the top parties in the labour supply chain and "supporting guidance will clarify the steps HMRC expect clients and agencies at the top of the supply chain to demonstrate they have exercised reasonable care.”

The Law Society said, however, that the proposed position "is … the grant of a wide discretionary power on individual officers, which will be constrained (if at all) by published guidance. This is neither satisfactory nor in accordance with the Government’s response".

"We suggest that any discretionary power should only be capable of exercise in specified circumstances. A person who exercises reasonable care and uses the CEST tool should not be at risk. Alternatively, the legislation should set out what factors the officer should consider prior to exercise of the collection power," the Law Society said.

CEST is HMRC's online tool for determining employment status.

Employment tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law, said: "We agree with the Law Society's comments that the secondary liability provisions are too wide as currently drafted. The fact that a business can be liable for the failings of others, despite having complied with its own obligations, reinforces the critical importance of proper due diligence and supply chain oversight by the engager".

"Businesses will need to understand their full labour supply chain, and build in the appropriate contractual protections and indemnification." he said.