25 March 2023
Failing to understand the labour supply chain can result in key employment tax obligations being overlooked, and the end user of the off-payroll worker’s services, or another party in the supply chain, being liable for underpaid tax and National Insurance contributions (NICs) liabilities. It could also expose them to significant penalties and other legal and reputational risks.
The onus is generally on the end user to assess the correct tax treatment under the relevant rules regarding:
- employment status (are the workers employed or self-employed for tax purposes);
- agencies or intermediaries (looking at the level of supervision, direction or control over the manner in which the worker undertakes their work); or
- off-payroll working (OPW) for the public sector and medium-sized and large businesses, also often referred to as the IR35 rules.
But in some circumstances these obligations may transfer to the agency contracting with the end-user, or the person responsible for paying the worker or their personal service company (the fee payer).
Applying these rules incorrectly carries an additional risk of a business failing to meet its obligations to prevent the facilitation of tax evasion under the Criminal Finances Act 2017, potentially leading to a criminal conviction with an unlimited fine, and brand, reputational and/or commercial damage. For larger businesses, failure to meet these obligations may also engage the senior accounting officer (SAO) rules, which could lead to reputational damage and/or financial penalties for both the business and the SAO.
Practical consequencesThe recent High Court case involving Nourish Training Limited contained some interesting points on supply chain due diligence. HMRC argued that the company, an employment business supplying workers provided to it by third party recruitment companies to industries such as recycling, food and logistics, ‘ought to have known that supplies were connected with fraud’. Some of the rationale included that the rates paid to the recruitment businesses were at the national minimum wage (NMW). HMRC argued, therefore, that Nourish Training should have known that it would not have been possible for its suppliers to comply with NMW to meet their statutory obligations as employers and also make a sustainable profit.
This case is particularly topical at present given the increasing use of umbrella companies to provide temporary workers, and HMRC’s recent focus on non-compliant umbrella companies operating tax avoidance schemes and on off-payroll working in general. It is also of particular relevance because of the introduction and extension of the reformed OPW administrative rules to medium-sized and large businesses from 6 April 2021, which remain in place despite the announcement of their proposed repeal by then Chancellor Kwasi Kwarteng in his September 2022 ‘Growth Plan’ fiscal statement. That statement was, of course, swiftly followed by the current Chancellor’s scrapping of that and various other proposals in the Growth Plan.
Other recent cases, such as that of K5K Limited, show that HMRC will not disregard the agency rules simply because a worker is purportedly operating through a personal service company. HMRC's Employment Status Manual is alert to this, stating that, 'the [agency] legislation is not avoided simply by including the [personal service] company's name on a contract obviously meant for use by an individual or by arranging for payment to be made to the company.'
Stay alert to all labour supply chain requirementsCertainly, engagers need to keep on top of what is a complicated area of tax, and while obligations under the OPW rules are an important consideration, and widely reported on, the focus should not only be on OPW compliance but on all the tax (PAYE, VAT etc) and social security legislation covering the supply of labour.
For more information, please get in touch with Susan Ball or your usual RSM contact.