From April 2020, the off-payroll working rules which already apply to contractors in the public sector will be extended to the private sector.
This will shift responsibility for determining whether an engagement falls within the off-payroll rules from the worker’s personal service company (PSC) to the engager (the business which requires the worker’s services).
Where there are one or more agencies involved in the labour supply chain between the engager and the PSC, the engager 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. However, in some circumstances, the engager (and the initial 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.
While we currently only have limited details as to exactly how this transfer of liability might work in practice, businesses that engage off-payroll workers will need to carry out due diligence on their labour supply chains ahead of next April to reduce their risk of being left on the hook.
The transfer of liability rules
HMRC outline how transfer of liability might work in their response to the latest round of consultation on off-payroll working:
- Liability for unpaid tax and NICs will sit initially with the party that fails to fulfil its obligations under the rules (this could be an agency that fails to deduct amounts from a payment to a PSC, or another agency higher up in the chain that fails to pass on information regarding whether the rules apply).
- If HMRC cannot collect the liability from them, it will transfer initially to the first agency in the labour supply chain.
- After that, if HMRC cannot collect from the first agency, the liability transfers to the engager.
This leapfrogging of the liability back to the top of the labour supply chain will occur regardless of how many other agencies there may be between the non-compliant party and the first agency.
HMRC’s reasoning is that the engager and first agency are best placed to ensure compliance further down the supply chain. However, this might prove difficult in practice – especially where there are long supply chains. It should also be remembered that perfectly legitimate businesses can go under through no fault of their own, something which it can be impossible to predict.
When might HMRC apply the rules?
From the above it appears that an engager or first agency in a chain could be held liable for unpaid tax and NICs even if they themselves have complied fully with their own obligations under the off-payroll rules. This would result in them effectively covering the cost of the tax and NICs twice – once when they pay their invoice (which will take these amounts into account) and a second time directly to HMRC.
The detail as to when HMRC might (or might not) apply the rules is therefore going to be key to risk analysis and preparation. However, we have only very limited information to date and no detailed legislation.
There are some comforting words in HMRC’s consultation response document, which states that “The proposals are not intended to transfer liabilities in cases of genuine business failure…”. The response goes on to say “The government will legislate in line with the consultation proposals and HMRC will make clear in guidance the circumstances in which it will not seek unpaid liabilities from parties further up the labour supply chain.”
This second statement appears to suggest that the legislation on transfer of liability could have a broad application which is then narrowed by guidance, something which the ATT has expressed concern about. Whilst guidance can provide some comfort, it cannot deliver certainty as it has no legal force and is subject to change at short notice without scrutiny or consultation.
ATT has therefore encouraged HMRC to stipulate clearly within the legislation both when the transfer of liability provisions will apply and when they will not (including cases of genuine business failure where tax avoidance is not in point). Guidance can then clarify potential points of uncertainty and give practical advice on the steps which businesses should take to reduce the risk of transferred liability.
What should businesses do now?
We are still waiting for HMRC to clearly set out when the transfer of liability rules might apply, and what businesses should do to get ready. However, we expect that engagers and first agencies in labour supply chains will need to carry out some measure of due diligence on the parties that come between them and the worker’s PSC.
As the off-payroll changes come into effect in a little over five months it makes sense to start taking some steps now. A useful starting point could be to look at the business’s existing supply chains for off-payroll labour. How long are these chains? Do you have a clear view of all the parties involved? Longer and more complex chains involving several agencies may carry a higher risk of a party failing to fulfil their obligations, and therefore require more detailed investigation.
Looking ahead, it is also a good idea to think about the procedures which could be put in place when taking on new off-payroll workers to ensure that you can get the information required to check your chain and minimise risk.