From April 2020, the off-payroll working rules which already apply to contractors in the public sector will be extended to the private sector.
These rules will shift responsibility for determining whether an engagement falls within the off-payroll rules from the worker’s personal service company (PSC) to the client (the business which requires the worker’s services).
Where there are one or more agencies involved in the labour supply chain between the client and the PSC, the client will not normally have to deduct tax or NICs from the payments it makes. Instead, responsibility for the deductions will fall on the party which directly pays the PSC (the ‘fee-payer’).
However, as set out in recently released draft legislation, in some circumstances the client (and the top agency in the chain) can be held liable for unpaid tax and NICs arising because someone else further down the labour supply chain fails to fulfil their obligations under the rules.
In summary, where HMRC believe there is no realistic prospect of recovering the unpaid tax and NICs from the fee-payer within a reasonable period of time, they will initially seek to recover amounts from the first agency in the labour supply chain, and where that is not possible, from the client.
HMRC have previously indicated that they will not seek to apply these rules ‘in cases of genuine business failure, where deliberate tax avoidance has not occurred’. However, whilst these reassurances are welcome, they are not reflected anywhere in the draft legislation and they therefore do not have the force of law. As a result, the draft legislation appears to give HMRC a fairly wide discretion as to when they can seek to recover unpaid tax and NICs from the first agency or client.
This combined, with the use of undefined terms such as ‘realistic prospect’ and ‘reasonable period of time’ leaves some uncertainty as to exactly how the transfer of liability rules may be applied in practice. This is unhelpful given the short amount of time remaining until the rules come into force, and the fact that the details as to when liabilities can be transferred will be important in framing the risk analysis and preparations of affected businesses.
The ATT believe that the draft legislation should be updated to set out clearly that the transfer of liability provisions will not apply in cases of genuine business failure where tax avoidance is not in point. We also recommend that potentially subjective terms (such as ‘no realistic prospect’ and ‘reasonable period of time’) are replaced with defined and clear terms, or as a minimum, are addressed in guidance as soon as possible.
This would provide some much needed certainty to clients and agencies and enable them to make appropriate preparations in time for April.