HMRC Update on End User Liability
End-User Liability Update from HMRC
Changes to the IR35 (off-payroll) reforms in the private sector are due to come into effect in April 2021. They will apply to large businesses and will mean that the liability for correct taxation will fall on the end hirer. New HMRC guidance outlines the supply chain compliance risks and details the checks that end-users should undertake to prepare for the upcoming changes and avoid the risk of financial liability.
HMRC has issued a new briefing around IR35 which provides more clarity on how HMRC will determine whether or not the end-user is liable for unpaid tax. This new guidance will apply in situations where the “fee payer” (the person expected to pay the tax – usually the umbrella company or agency) fails to pay and is actually or effectively insolvent when HMRC tries to recover the debt.
The announcement emphasises that end hirers who use personal service company/limited company contractors will be expected to carry out checks on their supply chain to avoid the risk of financial liability being transferred to them.
To ensure end hirers have the correct compliance processes in place, HMRC has provided details of the necessary checks they will need to carry out from April 2021 onwards.
Who is liable?
Previous briefings around IR35 legislation had already made clear that end-users will face liability for unpaid tax in situations where they:
- fail to take ‘reasonable care’ when issuing the SDS (Status Determination Statement),
- issue an incorrect SDS,
- or, fail to deal with the contractor’s challenges to their SDS.
For more information on the issuing of SDSs and how to ensure these are compliant and accurate, you can download our series of IR35 Masterclasses here.
In the latest guidance, HMRC has made clear that any members of the supply chain who are above the fee payer, such as end hirers and MSPs (Managed Service Providers), will face liability if the fee payer has received an accurate and compliant SDS but does not pay the tax.
Additionally, if HMRC has attempted to recover the debt from the fee payer and can’t, either bcause the company has dissolved or there is no realistic prospect of recovering the debt within a reasonable period, they may look to a ‘relevant person’ for payment. A relevant person would include:
- The first party in the supply chain (e.g. the agency, consultancy, or MSP the end-user contracts with)
- The end hirer (the highest person in the contractual chain).
HMRC will initially turn to the first party for repayment of unpaid tax, but if they cannot recover the debt from them, liability will rest with the end hirer.
Once a Tax Tribunal has determined how much tax the fee payer owes, the end-user and/or the first party will be unable to dispute this amount. However, HMRC has made clear that it will exercise its judgement and discretion when determining whether to use these powers.
When are end hirers and first parties liable?
If the fee payer has not paid the tax and NIC debt due to a ‘genuine business failure’, HMRC will not seek to recover the payment from the first party or end hirer. This will include situations where the fee payer becomes insolvent for reasons that aren’t connected to tax avoidance.
However, there are situations where the inability of the fee payer to make the necessary payments when asked will not be deemed a ‘genuine business failure’. In these circumstances, the end hirer or first party in the supply chain will be liable. This includes compliance failings or other bad practice on behalf of the fee payer, such as:
- Where a promoter of tax avoidance or any other party has entered the supply chain intending to avoid their necessary tax and NIC responsibilities
- Where an end hirer or first party in the chain asks workers to contract through a particular party that is likely to have been chosen due to its non-compliance with the new IR35 regulations (i.e. an Umbrella company operating a tax avoidance scheme )
- Where the fee payer or end hirer liquidates to avoid paying the relevant tax and NIC due under the off-payroll rules
- Where the end hirer or first party in the chain knew, should have known, or had reasonable grounds to suspect that the labour being supplied to them was supplied through a non-compliant party or a party who had no intention of complying with the rules.
What checks should end hirers and first parties carry out on their supply chain?
The latest briefing states that end hirers and first parties in the supply chain must undertake certain checks on their supply chain to prevent being held accountable for any unpaid tax or incorrect status determinations. This includes establishing the credibility and legitimacy of the parties in the supply chain, as well as checking:
- What is the agency/labour supplier’s history? Is there evidence of past problems with HMRC?
- Is the agreed contract price for the supply of contractors lower than market value? If so, is there a clear explanation for this?
- Have normal commercial practices been adopted in negotiating prices? Have you received any unusual ‘referral fees’? Is there any unusual sharing of tax savings?
- If they are a newly established business with minimal trading history, identify if/why they are offering to supply contractors for less than a long-established business in the same sector. Is this agency/labour supplier an older company disguised under a new name? If so, why?
- Is a supplier insisting that they further subcontract the labour supply? If so, why?
According to HMRC, the exact checks will vary depending on the circumstances and length of supply chains. Each organisation should take time and carefully consider which checks are suitable in their circumstances.
These checks set out by HMRC should also be carried out alongside other necessary supply chain requirements such as:
- The Criminal Finances Act 2017 – which encourages end hirers and staffing companies to ensure that contractors who are paid through supply chain partners, like Umbrella companies, receive payment into a UK bank account, in the name of the worker, with the correct tax payment
- The Modern Slavery Act 2015 – which protects workers from slavery, servitude, human trafficking, and other forms of forced labour
- The National Minimum Wage Legislation
- The Intermediaries Legislation 2014.
How will this impact you?
IR35 is complicated and will impact everyone in the temporary labour sector. Understandably, many contractors who are currently operating through their PSC will insist on continuing to work in this way as much as possible. And, where contractors find themselves ‘inside’ IR35 and in need of a new working solution, it is extremely likely that contractors will think about requesting increased pay from agencies and Umbrella companies to account for their new tax responsibilities.
For end hirers, some may fear the added risks of working with ‘outside’ contractors and decide to place blanket bans on PSCs. However, this doesn’t have to be the case. Those end hirers who wish to continue using PSCs can start preparing now by carrying out IR35 assessments on current contractors using an insurable and reliable assessment tool, like JSA’s IR35 Complete (LINK). This will ensure all contractors are working compliantly and provide insurable ‘outside’ IR35 determinations for additional peace of mind and protection from future HMRC challenge.
Everyone in the supply chain must ensure that assessments are carried out compliantly, all necessary checks are completed, and SDSs are issued correctly as failure to do so could implicate the entire supply chain. At JSA, our team of IR35 experts are always on hand to answer any questions you may have about managing your supply chain and ensuring compliance. If you’d like to find out more about how our in-house assessment tool can help you mitigate the risk of liability with insurable assessments and SDSs, click here to visit our IR35 Hub or download our IR35 Assessment Tool Brochure. Alternatively, to find out more about how IR35 reforms will impact your agency, you can find our IR35 Guide for Agencies here.
If you have any questions, please feel free to get in touch.