The draft IR35 legislation and the Government’s response to the off payroll working policy paper and consultation document published on 11 July confirms that the controversial transfer of liability provisions will form part of the new IR35 rules from 6 April 2020.
Who has liability under the new rules?
Under the new IR35 rules, the liability for the tax, NIC, and (potentially) Apprenticeship Levy due under PAYE where IR35 applies, will pass down the labour supply chain as each party satisfies its obligations.
The transfer of liability provisions, however, will potentially allow HMRC to transfer those liabilities to an agency at the top of the labour supply chain (i.e. the first agency which has the direct contractual relationship with the end-client) or to the end-client, where there is non-compliance further down the labour supply chain and it is not possible for HMRC to collect the amounts due from the offending party.
How will these rules be applied?
HMRC have stated that these transfer of liability provisions will only be applied in certain circumstances, for example where tax avoidance is involved rather than where there is a genuine business failure. HMRC guidance setting out the circumstances in which they will not seek to apply these liability transfer rules will be issued in due course and HMRC will also outline the steps which organisations can take to ensure due diligence on their internal processes. It looks like we will not know exactly how these transfer of liability provisions will work in practice until this HMRC guidance is issued and the PAYE regulations (which still require amendment to introduce these transfer of liability provisions) are updated.
Understanding the labour supply chain
What is clear at this stage is that end-clients using the services of workers operating via their own intermediaries, and agencies at the top of the labour supply chain, will need to be particularly mindful of these rules where such workers are procured through longer labour supply chains. The end client and the first agency will need to understand who the parties in their labour supply chain are and ensure that parties further down the chain are aware of and meet their obligations under IR35. Measures may also need to be taken by the end client and the first agency to protect themselves from unexpected liabilities, for example, by introducing indemnities into contractual arrangements and seeking appropriate insurance cover.