If you are involved in the supply or use of limited company contractors, then you will be aware that there are changes to the IR35 legislation on 6 April 2021.
These changes will require greater supply chain compliance to ensure the risks of continuing to use self-employed contractors are minimised.
The Government has made it clear that end users of self-employed contractors supplying their services through personal service companies will be expected to carry out checks on their supply chains if they are to avoid the risk of tax debts being transferred to them.
Blanket Decisions:
It’s unsurprising that faced with the possibility that tax liabilities will transfer through the supply chain and the increased work in making and dealing with status determinations that many industries moved to ban the use of personal service companies in their supply chains.
The proposed IR35 rule changes in the private sector took place in the public sector in 2017. The experience in the public sector demonstrated that an outright ban was not always possible due to problems with losing key talent or increasing the costs of a project due to the higher cost of a compliant PAYE alternative.
We will have to see whether these experiences are repeated in the private sector. Certainly, many of our private sector clients found this to be the case when planning for the original intended implementation date in April 2020. COVID may lead to more contractors being prepared to consider an employed or PAYE model due to the fact that many fell through the gaps of available Government support, but on the other hand many have been working remotely which is likely to strengthen an argument of minimal “supervision” and self-employment. Whatever the decision there will be significant changes to current labour supply chains.
When will end users be liable?
End users will be liable to pay any underpaid tax liabilities when:
- They have failed to issue a Status Determination Statement (SDS);
- They have failed to use reasonable care in preparing an SDS;
- They have failed to deal with an appeal/challenge to SDS; and
- If the fee payer has received a compliant SDS but simply doesn’t pay the tax due
Obviously, the exposure for payment even when an end user has done everything in their power to comply with their obligations is extremely worrying for end users.
There are some safeguards to HMRC requiring the end user to pay in these circumstances. They will only look to the end user if HMRC cannot recover the IR35 debt from the fee payer, for example if the fee payer has gone out of business OR HMRC have 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 from a “relevant person”.
A “relevant person” is:
- The first entity in the supply chain. An employment business, consultancy, managed service provider, master vendor or other party supplying the services to the end user client (Agency 1); or
- The client or end user (the highest person in the contractual chain).
If the fee payer is unable to pay the IR35 debt HMRC would look to recover the liability from Agency 1 or, if there is no realistic prospect of recovery from Agency 1, the client or end user.
It is important to note that neither Agency 1 nor the end user can appeal the amounts set out in a recovery notice once a Tax Tribunal has decided the debt is payable by the fee payer so early involvement may be necessary to minimise exposure.
If the fee payer is unable to pay due to a genuine business failure then HMRC will not pursue Agency 1 or the end user BUT if the fee payer’s business has failed due to compliance failings or other bad practice the HMRC will seek to recover from Agency 1 or the end user.
This means that supply chain compliance, transparency and visibility will be key after April 2021 if an end user is to effectively manage the risks of using self-employed contractors in their labour supply chain.
Labour Supply Chain Compliance:
HMRC’s Guidance sets out the situations where they will definitely look to Agency 1 or the end user so ensuring that none of these arrangements is present in the labour supply chain is crucial.
The situations which will give rise to a transfer of liability are:
- A promoter of tax avoidance has entered the supply chain;
- Any other party or other similar contrived situation has entered the supply chain with the intention to avoid paying the correct tax or national insurance liabilities;
- Where an end user or Agency 1 requires workers to provide their services by contracting through a particular party that is likely to have been chosen due to its non-compliance with the off payroll working rules;
- Where the liquidation of a business was to avoid payment of the income tax and national insurance liability;
- Where an end user or Agency 1 knew, should have known or had reasonable grounds to suspect that the labour being supplied to them was supplied through a party or parties in the labour supply chain that did not comply or had no intention of complying with the rules.
Supply Chain Audits:
Even if the above situations don’t provide a sufficient incentive for auditing the labour supply chain HMRC’s Guidance places a positive burden on Agency 1 and end users to carry out checks on their labour supply chain in order to prevent the IR35 liability passing up the supply chain. HMRC expects the credibility and legitimacy of the supply chain to be checked and provides some minimum areas it expects to be checked:
- The agency/labour supplier’s history;
- Is the agreed contract price for the supply of contractors lower than market value, without a clear explanation for why?
- Have normal commercial practices been adopted in negotiating prices? Are there unusual referral fees or agreements to share tax savings?
- Is the supplier a newly established intermediary with minimal trading history offering to supply labour cheaper than a long-established intermediary?
- Is a supplier insisting that they can further subcontract the labour supply? If so, why?
HMRC says that suitable checks to secure the supply chain will vary depending on the circumstances and length of supply chains. Each organisation should consider what checks are suitable in their individual circumstances.
Obviously the greater the use of outsourced labour in the supply chain the more robust the auditing should be. The IR35 changes are just one part of the legislative jigsaw driving better labour supply chain compliance. In addition the Criminal Finances Act, the Modern Slavery Act , the National Minimum Wage, Intermediaries and Immigration legislation all drives a need for more robust supply chain compliance and as such, better auditing and checking of labour supply chains to ensure that the practices match the contractual promises made.
Next steps:
- Can you or do you want to make a blanket decision about using limited company contractors?
- Identify and understand your current arrangements;
- Ensure effective dialogue with your suppliers and contractors;
- Consider internal resource to carry out status determinations and appeals or challenges;
- Identify the cost implications of the available models;
- Consider alternative solutions – statements of work or margin only supply arrangements;
- If third parties are being used for status determination or compliance checking then make sure that the checks are appropriate to your business, that the providers understand the legal basis of IR35 and how they work with other workplace legislation. If the checking or status decision is backed by insurance then ensure it provides the cover promised and be aware that the existence of insurance can, in some circumstances cause tax liabilities for the supply chain;
How we can help:
We understand the labour supply models inside out and work with employment tax specialists to ensure that all angles are covered and that you can be confident that you are operating compliantly.
We are happy to work with you understanding your current supply chain, identifying the issues and available solutions.
We supply training on status determinations and appeals. We offer independent reviews of status decision making and appeal decisions.
If you already know the model you’ll be using, then we can advise and draft on your supply contracts.
For any help or assistance in navigating the IR35 changes then please contact our team of experts.
