With the additional complexities created by the new IR35 rules from 6 April 2021, the need to undertake due diligence on labour supply chains for tax and NIC purposes is more important than ever. Failure to do so could result in unexpected income tax and NIC liabilities.
Where off-payroll workers provide their services via third parties such as agencies or umbrella companies it is crucial to understand the supply chain, who the workers are engaged by, and how that party has engaged the worker. Failing to do this can result in the end user of the worker’s services, or another party in the chain, being liable for underpaid tax and NIC, as well as exposing them to other legal and reputational risks.
The introduction of the new IR35 rules from 6 April 2021 has further complicated the position, and with HMRC’s continued focus on off-payroll workers, compliance has just become much more complex.
What are the key considerations for tax and NIC purposes?
1. Do the off-payrolling working or 'IR35' rules apply?
If an end-user is engaging off-payroll workers via a third party or labour supply chain, and those workers are operating via their own intermediary (typically a personal service company) the end-user could have obligations under the off-payroll working rules (more commonly known as 'IR35'). The end-user may, need to assess the worker’s status and issue them, and the third party you are contracting with for their services, with a Status Determination Statement ('SDS'). If they do not do this, and it transpires that IR35 applies, the end-user can be held liable for any tax and NIC due. It may not be immediately obvious that a worker is operating via their own intermediary, so it’s important that the correct questions are asked to establish this.
If IR35 applies, and the end-user satisfies their obligations, the liability for the tax, NIC, and (potentially) the Apprenticeship Levy due under PAYE, will pass down the labour supply chain with the SDS, as each party satisfies its obligations, ending with the fee payer/deemed employer. The controversial transfer of liability provisions will, however, allow HMRC to transfer unpaid liabilities further down the labour supply chain to:
- an agency at the top of the chain (ie the first agency which has the direct contractual relationship with the end-client); or
- to the end-client itself.
The end client and the first agency need to understand who the parties in their labour supply chain are and ensure that they meet their obligations under IR35. The end client and the first agency may also need to take measures to protect themselves from unexpected liabilities, for example, by introducing indemnities into contractual arrangements and seeking appropriate insurance cover.
2. Does the agency and temporary workers legislation apply?
If a worker being provided via a third party or labour supply chain isn’t operating via their own intermediary, and therefore IR35 doesn’t apply, it is still important to consider how the worker is engaged.
For example, where a worker is engaged by a third party on a self-employed basis, the agency and temporary workers legislation could apply. Broadly, these rules apply where:
- the worker personally provides services (which are not excluded services) to a client/end-user;
- there is a contract between the client (or a person connected with the client) and a person who is not the worker, the client, or a person connected with the client (ie the 'agency');
- in consequence of that contract: (i) the worker’s services are provided; or (ii) the client or any person connected with the client pays, or otherwise provides consideration for the services;
- the worker is subject to (or to a right of) supervision, direction, or control as to the manner in which they provide their services; and
- remuneration receivable by the worker in consequence of providing the services does not constitute employment income before the provisions of the agency legislation are applied.
Where the above criteria are met, the worker is treated as holding an employment with the agency (ie the first agency which has the direct contractual relationship with the end-client) who must then operate tax and NIC under PAYE when paying that worker.
However, the liability for the tax and NIC due under PAYE, and the responsibility to operate PAYE, can pass to the end-user in certain circumstances. For example when:
- The first agency is an overseas agency outside the territorial scope of PAYE (see further below); or
- The first agency is provided with documents by the end client which state that the agency and temporary worker’s legislation does not apply, and these documents were found to be fraudulent, and the agency legislation did apply. This might be where the end-client provides a document which incorrectly says that there is no supervision, direction, or control as to the manner in which the worker provides their services.
3. What about chains which involve overseas agencies?
The rules affecting overseas agencies were significantly amended with effect from 6 April 2014, making changes to who is responsible for operating tax and NIC under PAYE.
The revised rules ensure that, where a worker is employed or engaged by or through an offshore intermediary or agency, and works for a UK end-user and there is no UK agency in the contractual chain, the client that the person works for is treated as the employer responsible for operating PAYE, where it is due.
What should organisations do?
Clearly the rules here can be particularly complex and professional advice may be required to ensure that risks are identified, addressed, and the correct tax and NIC treatment is applied.
In accordance with HMRC’s guidance, we recommend applying three key principles to labour supply chain due diligence.
Checking involves understanding the labour supply chain, and the risks associated with that chain. To do this the end-user and/or the first agency must be fully aware of each party in the supply chain, how a worker is engaged, and by who.
Where risks are identified, organisations should act to address, mitigate, or completely remove those risks from their labour supply chain.
3. Ongoing review
Due diligence must be undertaken regularly for it to be effective. It could be that the labour supply chain changes over time, and the risks associated with that supply chain can therefore also change.