IR35 debt transfer and relevant person provisions: demystified
There has been a lot of comment in the contractor media recently on the subject of debt transfer within IR35 contracting supply chains.
While these concerns are, without doubt, well-founded there is confusion as to what the new rules are and where they flow from, writes David Geldard, senior tax consultant on the contractor solutions team at Markel Tax.
The difficulty for affected parties comes from the need to jump around different areas of the April 2021 off-payroll legislation to gain the full picture; thereby making it hard to focus on the practical steps that contractors’ engagers and agencies can take to limit their risk.
As always, the devil is in the detail. And in this case it can be found lurking in the new s688AA ITEPA 2003 (introduced by Finance Act 2020) and proposed new regulations 97LA to 97LK which are to be inserted into The Income Tax (Pay as You Earn) Regulations 2003 by the draft Income Tax (Pay as You Earn) (Amendment) Regulations 2020. The key point is that regulations 97LA –LK have not come into force yet, because the new IR35 rules were postponed until April 2021.
When will a debt be transferred?
Before a debt transfer can arise under the new IR35 rules, there must be a failure by the fee-payer to operate PAYE. The fee-payer is normally the party in the supply chain who has the contract with the IR35-caught contractor’s intermediary. But if a Status Determination Statement (SDS) is not passed down to them, then existing rules can pass the fee-payer’s obligations to the last party to receive the SDS or the client (a deemed fee-payer).
The failure we are interested in occurs when the fee-payer (original or deemed) defaults in deducting or paying over PAYE. This is where the new regulations 97LA – LK will come into action. These require that:
- The debt must be PAYE tax due under the IR35 charging rules of s61N ITEPA 2003;
- HMRC must consider that there is no realistic prospect of recovery from the fee-payer;
- The rules do not operate where the client and the fee-payer are the same party;
- The debt must arise under ‘new IR35’ post-April 2021; and
- A valid recovery notice must be issued to the ‘relevant person’.
The relevant person (as defined in s688AA ITEPA 2003) is the person who has to meet the liability.
That legislation is also directly tied into the new IR35 provisions, in the same way that the new regulations 97LA – LK are, so it only applies to an IR35 deemed PAYE payment under s61N.
Helpfully, section 688AA defines the ‘relevant person’ as being someone other than the deemed employer who was originally liable for the tax and NIC, and who is
- the highest person in the chain identified under section 61N(1) (which is normally the client), or
- the second highest person in that chain and who is also a qualifying person (within the meaning given by section 61N(8)) at the time the deemed employer is treated as having made that deemed direct payment.
The inclusion of the qualifying person provision excludes any party in the chain who is:
- not within the UK or
- has not had a SDS passed to them or
- is controlled by the IR35-caught contractor.
So after all the many legislative section numbers and cross references, it boils down to this; if the fee-payer makes a payment to the IR35-caught contractor but defaults on the PAYE and there is no reasonable prospect of getting that money from them, the liability passes to either the client or the next party below the client -- as long as neither of them are the fee-payer, are outside the UK or are controlled by the IR35-caught contractor.
Why couldn’t HMRC or HM Treasury have just said that in the first place!
Managing the exposure
If you are reading this as an end-client, keep in mind that the debt transfer risk is likely to be yours. Carry out ‘due diligence’ to ensure you understand the supply chain and that there is good compliance within the payment chain. Make sure that the SDS is issued in good time to allow the fee-payer to apply the result before making the first payment. And finally, watch for warning signs that tax and NIC is not being handled correctly and take action if this occurs.
If you are an agency sitting in the middle of the chain, ensure the SDS is passed on immediately as you receive it, as this impacts on who the qualifying person is.
The real key from April is going to be understanding the payment chain and to ensure a good flow of information both upwards and downwards, so that any problems are spotted quickly and can be rectified without delay.