The UK recently issued updated guidance about when end clients will be liable for unpaid IR35 tax by those within their supply chains.
The liability comes into play for a contingent workforce program when a staffing provider or intermediary down the supply chain engages a personal service company (PSC) contractor and then fails to pay the required taxes to HM Revenue and Customs.
Programs should take the guidance into account as they prepare for changes to the IR35 regime that will come into force on April 6, 2021, barring any further political and/or legal developments.
According to international legal practice Osborne Clarke, the guidance, which was issued by HM Revenue and Customs, clarifies that end clients within a supply chain that engages PSC contractors will be expected to carry out checks on their supply chain if they are to avoid the risk of transferred tax debt liability. The guidance highlights an additional source of liability for end users, as well as for managed service providers and similar intermediaries higher up the payment chain than the “fee payer” — the organization that engages and pays the PSC directly and is responsible for paying the related taxes to HMRC.
The liability arises when the fee payer has received a proper status determination statement and simply does not pay the tax, though there are exceptions.
Where HMRC cannot recover the IR35 debt from the fee payer, or has attempted to recover the debt and is satisfied that there is no realistic prospect of recovering the debt from the fee payer within a reasonable period of time, HMRC may decide to recover the debt up the supply chain, which could be the first entity in the supply chain such as an MSP or the end-user client.
HMRC will not seek to recover from the first entity or the end user where the failure to account for tax and National Insurance Contribution by the fee payer who should initially have paid it is as a result of a genuine business failure on the part of the fee payer. However, Osborne Clarke noted there are situations where the fee payer cannot pay HMRC that will not be “genuine business failure.”
The guidance may mean that many end users will become concerned about the use of PSCs via staffing companies and consultancies.
Last year, a number of high-profile banks — including Barclays, Lloyds, HSBC, and Morgan Stanley — announced that they will no longer engage with contractors who work through personal services companies, instead employing individuals on pay-as-you-earn (PAYE) terms or via an umbrella company. The announcements were presumably to avoid becoming involved in IR35 determinations and tax risk.
Osborne Clark stated that it seems likely that “end clients will increasingly concentrate spending power relating to contract workers on the more sophisticated suppliers who can most easily evidence the checks that are carried out, on behalf of the end user, on the supply chain.”
Earlier this year, HMRC released draft secondary legislation for IR35. According to Fiona Coombe, director of legal and regulatory research at SIA, the secondary legislation is “necessary to give HMRC the power to recover any unpaid tax from the agency supplier principally, and, if there is no realistic prospect of recovery from the agency, then the client.”
For more on the upcoming IR35 changes, the report “IR35 off-payroll working rules: FAQs updated” by Fiona Coombe is available to download here.