Off-payroll: Collecting debts from third parties
The new off-payroll rules will allow HMRC to recover unpaid PAYE liabilities from other relevant parties in the labour supply chain. Rebecca Seeley Harris reviews how this power will work.
It is worth explaining briefly the phraseology and interaction of IR35 and off-payroll: chapter 8 and chapter 10 of ITEPA 2003. The term “IR35” refers to the law in Chapter 8 of ITEPA 2003 and was the original name of the press release used to announce the tax initiative in 1999.
Chapter 8 provides the details for when the assessment (whether IR35 bites) is made by the contractor. It applies up to 6 April 2020 in the private sector and will continue to apply after 6 April 2020 for when the engager (referred to as the “client” in the law) is a small business.
Chapter 10 provides the legislation for the assessment (inside or outside IR35) to be made by the engager in the public sector, and by engagers in private sector where they are medium or large organisations. So, technically “IR35” refers to only the assessment by the contractor, although it is widely used to describe both Chapter 8 and Chapter 10.
There is, however, a significant difference between the two chapters as will be explained later but being “inside or outside IR35” is a phrase that is used to describe whether tax will be deducted or not.
I reviewed the draft primary legislation to reform the off payroll working rules in July 2019. That legislation includes powers to make secondary legislation to allow HMRC to recover unpaid PAYE liabilities from other relevant parties in the labour supply chain.
In the first instance, this would be the first UK-based agency in the chain, or alternatively from the client receiving the individual’s services.
The draft secondary legislation is now open for consultation. This consists of two draft statutory instruments, for PAYE and social security contributions, and is accompanied by a techincal note.
The draft PAYE regulations allow for the recovery of PAYE income tax liabilities from a third party. The recovery is sought where a deemed employer (the party treated as making a payment of earnings to the worker’s intermediary) has failed to make PAYE tax deductions from payments made in relation to an off-payroll worker.
This is where there is no realistic prospect of recovering the outstanding income tax from the deemed employer within a reasonable period.
The draft Social Security regulations make similar provisions to those provided for in the draft primary legislation and in the draft PAYE regulations for NICs purposes.
When the regulations apply
The regulations allow for the recovery of unpaid PAYE where Chapter 10, Part 2 ITEPA 2003 applies to an engagement and the deemed employer has failed to make PAYE tax deductions.
The “deemed employer” under the ITEPA 2003 chapter 10 is ordinarily the person who is the fee-payer. Once the assessment under chapter 10 has been made as “inside IR35”, the income becomes deemed income and the fee-payer becomes the deemed employer.
In line with HMRC’s response to the consultation on the April 2020 reform, HMRC will not exercise this power in the case of genuine business failure of the party ordinarily liable for the Income Tax and NICs.
HMRC will first seek to recover any unpaid tax liabilities from the agency the engager contracts with, where this agency is UK-based. This is known as “agency one” in the labour supply chain. Where HMRC is of the view that there is no realistic prospect of recovering the outstanding income tax from agency one, HMRC will then seek to recover unpaid liabilities from the engager.
Conditions for recovery of the relevant PAYE debt include that a recovery notice has to be given to the relevant person (defined in ITEPA 2003, s.688AA(3)) during the relevant period. The notice must also comply with the information required in Reg 97LG and be accompanied by a statement made by the officer of HMRC that in the officer’s view there is no realistic prospect of recovery within a reasonable period.
The relevant person has 30 days to pay the PAYE debt or they can appeal it on various grounds.
The draft regulations also deal with the information to be included in RTI returns. These require employers to identify payments which relate to an off-payroll worker subject to Chapter 10, Part 2 ITEPA 2003.
Finance Bill 2020
The consequential amendments and both sets of new draft regulations reflect draft provisions to be inserted into the ITEPA 2003 by virtue of Finance Bill 2020.
The consultation invites comments on the technical detail of both draft statutory instruments by 19 February 2020. You can contribute your comments by email to: [email protected]
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Rebecca is a leading expert in ‘employment status’ and IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35...