We have previously highlighted the lack of clarity concerning the international aspects of the impending changes to UK off-payroll worker rules. HMRC recently issued draft guidance, so what does this tell us about how the new rules will apply to overseas workers and businesses?
From April 2020, an end client that benefits from a worker’s activity must determine that worker’s status and issue a status determination statement (SDS) to both the worker and the entity next to them in the contractual chain, which must then be passed on through the supply chain. The rules dictate which entity in the supply chain is responsible for operating PAYE and thereby collecting income tax, National Insurance contributions (NICs ) and the apprenticeship levy on a deemed direct payment of earnings (broadly speaking, any payment within the contractual chain).
Principles relating to businesses
An entity in the contractual chain cannot be held responsible for the operation of PAYE unless it is resident or has a place of business in the UK. However, this does not mean foreign businesses without a UK place of business can ignore the legislation entirely.
HMRC guidance confirms that, in cases where the other parties are in the UK, ‘the rules can still apply if the [end] client is based overseas.’ The overseas end client is therefore expected to be aware of its obligations under UK rules and to issue an SDS. As this is the first step in the process, what happens if the end client is unfamiliar with UK legislation? Presumably, no SDS will be issued which means the PAYE obligation cannot transfer to any other party in the chain – even those based in the UK. It is unclear how HMRC can impose or enforce any punitive action against the overseas end client in these circumstances.
If no entity in the contractual chain has a UK presence, ‘then the [end] client is the deemed employer and responsible for the deduction of tax [and] NICs’. What if the client is a foreign company with no presence in the UK? How will that responsibility be enforced by HMRC?
The EU social security agreement (which still applies during the EU withdrawal agreement transition period ) contains provisions for the cross-border collection of social security liabilities. It is not clear whether this EU provision could be used to collect a UK NICs liability that arises under the off-payroll intermediaries’ rules, especially where the other contracting state may have a contrasting view of the worker’s employment status. Nor do we know what will happen after the transition period (scheduled to end on 31 December 2020).
Principles relating to workers
‘The worker has to be a person who is within the UK charge to tax and[/or] liable for Class 1 NICs’ ; otherwise the off-payroll rules do not apply. General principles of UK tax legislation apply in determining residence and the liability to tax and/or NICs. Nevertheless, in complex cases it will be difficult for the end client to establish whether a tax and/or NICs liability exists.
HMRC states that, ‘a worker carrying on duties in the UK for an end client will normally fall within scope of the UK charge to tax and be within the off-payroll intermediaries’ legislation,’ although it goes on to mention, ‘there are some exceptions for non-UK residents visiting the UK briefly.’ This reinforces the view that overseas businesses are expected to apply the UK rules when applicable, but it also raises further questions.
In what circumstances should a business make inquiries to ascertain a worker’s UK liability? We have seen that there is a risk in cases where a worker either resides in the UK or plans to work here, but a client may not always be party to such information (see example below).
What constitutes satisfactory evidence that no UK liability exists? HMRC suggests that, in the case of social security, ‘Class 1 NICs should be deducted unless the worker coming to the UK can present documentation proving that they pay social security contributions in another country for which special rules apply or domestic legislation deems NICs not to be due.’ There is no advice as to how a worker might obtain a document confirming ‘domestic legislation deems NICs not to be due’ and we are not aware of any such document.
What do we know for sure?
We can say with certainty that overseas businesses are expected to comply with their ‘end client’ obligations under UK legislation, even it is not clear how those obligations can be legally enforced.
HMRC draft guidance clarifies that PAYE liabilities will not be imposed on any intermediate entity in a contractual chain that is neither resident, nor has a presence in the UK. It is not yet known whether a similar exclusion will be explicitly granted to end clients.
The draft guidance confirms that the off-payroll rules do not override general principles governing an individual’s liability to tax and NICs. If a worker is not within the scope of the charge to UK tax and/or NICs, their engagement is not within the off-payroll rules. Furthermore, ‘it does not matter where the worker’s [personal service company] is based… this does not affect the operation of the rules.’
Engagers of off-payroll workers, wherever they are based, should therefore consider what hallmarks might be used to flag a worker’s potential exposure to UK tax and/or NICs and what level of evidence will be required to confirm the absence of a UK obligation. Proving negatives and obtaining written confirmation from tax authorities can both be challenging undertakings.
A French client (FranceCo) engages a worker, Pierre, via an international agency to provide support for a French IT project. Pierre plans to carry out the work remotely and to provide his services via his French personal service company (PSC). The international agency, though based in France, has a place of business in the UK. Pierre has a French address and passport but he splits his time between France and the UK, where his wife has recently been seconded by her employer. He plans to undertake most of the IT project whilst in the UK, visiting his family. Neither FranceCo nor the agency know his plans. What are the possible outcomes?
- FranceCo is unaware of the UK rules and does not issue an SDS. The lack of SDS means that no other entity in the supply chain can be made liable for operating PAYE. As a result, the agency has no liability despite having a place of business in the UK. FranceCo is ostensibly liable for operating PAYE as the end client but, being unaware of the UK rules, it fails to operate PAYE. It is not clear what action can be taken by HMRC.
- Alternatively, FranceCo is aware of the UK rules but has no reason to believe Pierre has any exposure to UK tax and/or NICs. It wrongly assumes he is not within the off-payroll working rules and it does not issue an SDS. The rest of the outcome is as above.
- According to current guidance, FranceCo is expected to be aware of the UK rules and carries out an employment status assessment applying UK principles, issuing an SDS to its worker if appropriate. The international agency receives a copy of the SDS in all relevant cases and immediately recognises what this is. Knowing that it has a place of business in the UK the agency asks Pierre to supply documentary evidence that he is not liable to UK tax, nor to NICs (even though Pierre and the project have no obvious connection to the UK). Pierre struggles to establish his tax and NICs position and, in any event, is unable to obtain documentation confirming there is no liability. In the absence of such documentation, the French agency registers a UK payroll and operates PAYE, deducting UK income tax and NICs whenever it is required to make a payment to Pierre’s PSC.
In this example, we have not established conclusively whether or not Pierre is ultimately liable for UK tax and/or NICs. It is possible that he is not liable and that tax and NICs are being deducted unnecessarily. It is also possible that he has a tax and/or social security liability in his home country.
RSM will continue to monitor this situation. It is hoped that future HMRC guidance may provide further clarity regarding some of the above scenarios. For more information, please get in touch with Susan Ball or Phil Partington.