Contractor sector in a spin over IR35 liability and debt transfer rules
Contractors’ advisers are doing their utmost to distinguish between ‘transfer of liabilities’ and ‘transfer of debts,’ as both are contained in 2020’s draft IR35 legislation and neither are popular.
Further blurring the lines between the two, contractors, agencies and end-users have just two weeks to feedback on each provision, given that the consultation on the draft closes on September 5th.
Another unifying factor is that each April 6th provision lands a tax bill on a party arising from the action, or inaction, not of themselves, but of another party in their chain supplying the PSC.
The business community hates this imposition, yet it explains advisory Markel Tax’s view that the new IR35 is “self-policing.” It also vindicates an ex-inspector who says HMRC wants to ‘make its job easier.’
On transfer of liability, under which any party’s non-compliance -- such as not sharing a ‘SDS,’ shifts the liability to the first agency, then potentially to the client, Lawspeed agrees that HMRC has got it good.
“The idea has not been well-received by hirers or agencies but from HMRC’s perspective, it makes their ability to recover unpaid levels of tax and NICs a lot easier,” the recruitment law firm said.
But for end-users, things will get a lot harder as they face the prospect of being saddled with the PSC’s IR35 tax liability if their contractual partners fail to reflect the off-payroll rules.
'Liable for the mistakes of others'
“One could argue that this approach results in legitimate, compliant businesses being liable to the mistakes of other parties,” says Robert Salter of chartered accountants Blick Rothenberg.
Yet HMRC argues that end-clients and ‘first agencies’ are the most influential entities in the chain, as they exert the most control, so it is “appropriate” to make them, in effect, enforcers.
Moreover, such agencies should only face liability (for PAYE and NICs) if the party in the supply chain who first fails their off-payroll rule obligations “still does not comply.”
Only in that circumstance, the Revenue adds: “If the first agency in the supply chain also does not comply, then the liability would move to the client organisation.”
'Wholly over the top'
Adrian Marlowe, managing director of Lawspeed said: “The idea that the hirer could be liable even if it made a correct decision about rules applying seems wholly over the top.
“It forces the hirer to check supply chain compliance… [and so] is likely to encourage hirers to avoid use of PSC contractors, or to make sure they have strong indemnities in place [and those] will have the same [deterrent PSC] effect on chain suppliers.”
Less objection to end-users being ‘on the hook’ centres on when the engager fails to issue a Status Determination Statement (SDS) containing their view of the PSC’s IR35 status.
'Hot potato, pass the parcel'
“Once it has passed the SDS on to the party below it in the chain, it then disposes of this potential liability as fee-payer,” says Markel Tax’s David Harmer, referring to the end-user.
“Nevertheless, the SDS becomes somewhat of a ‘hot potato’ when there are multiple parties in the contractual chain.
“It’s like a game of pass the parcel, whoever is left holding the SDS when HMRC come knocking wins the prize of potential tax and NI liability.”
Status review firm Qdos confirms: “Until the Status Determination Statement is shared, the business will be considered the ‘fee-payer’ in the supply chain and therefore liable for IR35.
“Therefore, it’s vital that businesses produce and share these statements.”
And produce and share them quickly too, as to avoid exposing themselves, they will need to “dispose of their fee-payer status before a relevant payment is made to the PSC,” Harmer advises.
Legal advisory Fieldfisher recommends: “Every company should have policies, procedures and contractual protections in place to ensure information can be passed smoothly up and down contract chains.”
But policies and procedures cannot be finalised until the steps clients and first-agencies ought to take to demonstrate “reasonable care” are unveiled by HMRC.
The Revenue is under pressure, however, because its existing guidance in the shape of flow charts to show who’s liable under the reformed IR35 have been denounced as “red herrings.”
The ‘reasonable care’ steps are outstanding though, and were promised by HM Treasury in July, alongside a vow that the transfer of liability provision will not catch failed firms.
“The proposals are not intended to transfer liabilities in cases of genuine business failure, where deliberate tax avoidance has not occurred,” Treasury officials wrote, adding:
“HMRC will make clear in guidance the circumstances in which it will not seek unpaid liabilities from parties further up the labour supply chain. HMRC’s guidance will also advise organisations on steps they can take to help ensure due diligence of their internal processes.”
At Markel, Mr Harmer hopes the guidance will clear up a ‘large number of unconsidered practicalities’ to do with the liability transfer rules, such as where in the chain HMRC will start an IR35 enquiry.
Or, whether a lower chain fee-payer would be liable, in the event that the end-user took reasonable care in completing the SDS, only for HMRC to disagree with the status decision.
But on top of the draft legislation facing first-agencies and clients with liability, it also grants HMRC the ability to recover outstanding IR35 taxes from third parties -- a “relevant person.”
“The draft only mentions that recovery can be made from a person who is a party to the arrangements involving an intermediary,” says Chartergates, sounding disappointed with the level of detail.
The employment law firm added: “This would seem to exclude personal liability for any company directors, the worker, or the end-client, but we cannot be sure who will be targeted until we see the draft PAYE regulations.”
That’s because the debt transfer provisions under the new IR35 will be made by amending the PAYE regulations, in what PayStream says is an unsurprising move, yet one with almost unchecked implications.
“The far-reaching provision at Section 688AA enables HMRC to go after any person who was ‘party to the arrangements’ in which a payment was made in the event that PAYE/NIC cannot be collected from the appropriate entity,” the contractor accountancy firm says.
“This is not a huge surprise since one of the main reasons for the introduction of the legislation was HMRC’s historical difficulty in enforcing IR35. Even when HMRC succeeded in winning a case there was often no money left.”
The firm’s legal director Julian Ball summed up: “What this provision does is to allow HMRC to go after a client where, for example, an agency is insolvent. This will make clients doubly careful about who they deal with.”
'Similar to MSC debt transfer provisions'
Also with an eye on what the debt provision means ‘on the ground,’ Markel said HMRC appeared to be looking at the highest agency in the chain first and foremost, “and where it cannot recover from the agency, then the end-client.”
At Qdos, CEO Seb Maley reflected: “When focusing on agencies being at risk, then yes, IR35 reform bears certain similarities to the Managed Service Company legislation’s rules around transferring of debt.”
“While this will, of course, be a concern…agencies’ main concern focuses around liability [and] the fact that they ultimately carry the risk, assuming that everyone meets their obligations in terms of communicating the determination.
“They [even] carry a potentially significant liability for someone else’s [IR35 status] decision. It links to the question of ‘reasonable care’ and the fact that it remains completely undefined.”
'Bear the brunt'
Staffing group APSCo agrees that of the two transfer provisions, it is the liability one that really stings their member companies.
“We [are] extremely disappointed that fee-payers will shoulder the liability of incorrect status determinations – particularly as this is at odds with what was anticipated,” the group said.
“It is frustrating that recruiters will, in most cases, continue to bear the brunt of liability in the supply chain whether as the fee payer or the first-tier supplier.”
Sam Hurley, APSCo’s operations director added: “The legislation states that ‘reasonable care’ should be taken, but there is not yet any certainly around what ‘reasonable’ should look like. In our view, there is still too much room for manoeuvre.”