The new Off-payroll legislation came into force in the public sector in April 2017, followed by a roll-out to the private sector in 2021 for medium and large companies. Firms in scope must conduct status assessments of their contractors operating via limited companies and are ultimately responsible for the tax liability.
The April 2021 updates also included the addition of debt-transfer provisions, applicable for supply-chains, whereby if the correct tax cannot be recovered from the fee-payer (e.g. the recruitment agency which pays the contractors limited company), then HMRC can seek to recover the tax from parties above them in the supply chain, including the hiring firm. The tax debt cannot be passed to the contractor.
Five key points about Off-payroll debt transfer:
- Contractors do not have IR35 tax liability under the new Off-payroll legislation.
- Contractors only have IR35 tax liability under the original Intermediaries Legislation.
- Contractors cannot buy an insurance policy to protect someone else's tax liability risk because they have no insurable interest.
- Debt transfer under Regulation 72 does not apply to the new Off-payroll working.
How do the debt transfer rules work under the new Off-payroll legislation?
The debt transfer rules are designed to pass the tax liability back up the supply chain in instances where the "fee-payer" who was supposed to deduct the tax did not do so. The rules encourage clients and managed service providers (an MSP is a large agency that then uses other agencies to source talent) to secure their supply chains and pay the tax.
In the above diagram, we can see that a hiring firm has assessed the status of a contractor working via a limited company and given a valid Status Determination Statement to the contractor and the recruitment agency. This action makes the agency the "fee-payer" and liable for the tax, as per section 61N(5).
If the recruitment agency fails to collect and pay the correct tax to HMRC, then HMRC has powers under the debt transfer provisions to pass the tax debt back up the supply chain to a "relevant person" – this would be either the hiring firm or a recruitment agency below them, where there are multiple agencies in the supply chain. Significantly, these powers do not extend to passing the tax liability to the contractor because neither the limited company nor the contractor is a "relevant person".
Debt transfer legislation – Section 688AA and 97LA to 97LK – a technical walkthrough
The debt transfer legislation for debt arising under Off-payroll working came into force as part of the Finance Act 2021, and the legislation is in two places:
- Section 688AA of Income Tax (Earnings and Pensions) Act 2003
- Section 97LA to 97LK – the Income Tax (Pay As you Earn) (Amendment No. 3) Regulations 2020
97LA to 97LK were enacted under Statutory Instrument 2020/1150, titled "DEBTS ARISING UNDER CHAPTER 10 OF PART 2 OF ITEPA (INTERMEDIARIES)".
97LA(1) states that references to a "PAYE debt" must be construed as references to "a deemed employer PAYE debt".
"A deemed employer PAYE debt" is defined in 688AA(2) and means an amount that a person ("the deemed employer") is liable to pay under PAYE regulations in consequence of being treated under section 61N(3) as having made a deemed direct payment to a worker.
97LA(2) says a PAYE debt may be recovered from a "relevant person", and 97LA(3) says a PAYE debt may only be recovered if an officer of Revenue and Customs considers there is no realistic prospect of recovery of all or part of it within a reasonable period of time.
A "relevant person" is defined in Section 688AA(3) as a person who is not the deemed employer and who is the highest person in the chain identified under section 61N(1) in determining that the deemed employer is to be treated as having made the deemed direct payment. Or, the "relevant person" can be the second highest person in that chain and is a qualifying person (within the meaning given by section 61N(8)) at the time the deemed employer is treated as having made that deemed direct payment.
61N(1) deals with the supply chain, and 61N(1)(a) states that the highest person in the chain is the client.
Section 97LF deals with appealing a debt transfer recovery notice and lists the possible grounds of appeal in 97LF(3). 97LF(3)(d) states that one ground can be "that the person is not a relevant person in respect of the PAYE debt".
In non-legal jargon, the debt can be transferred to either the hiring firm (the client) or the agency below them if there are multiple agencies in the supply chain. If HMRC attempts to transfer the debt to the contractor, the contractor can easily appeal by stating they are not a "relevant person".
Note: For National Insurance Contributions (NICs), similar legislation applies, which is contained in Statutory Instrument 2020/1220, which amended The Social Security Contributions (Intermediaries) (Miscellaneous Amendments) Regulations 2020.
Does Regulation 72 Income Tax (PAYE) Regulations 2003 enable debt transfer?
Where the end client fails to operate IR35 PAYE, a redirection notice (transfer of debt to the individual) under Regulation 72 does not apply because the end client is not the actual employer. In contrast, under Off-payroll working, the employer of the contractor is their limited company, not the end client.
The PAYE Regulations have been updated with sections 97LA to 97LK, which specifically detail how the debt transfer provisions work and do not include transfers of debt to contractors, as stated above.
As IR35 Shield has repeatedly advised the market – there is no legislative tax risk for contractors under Off-payroll working (Chapter 10 ITEPA). And because there is no risk, any insurance policy sold to a contractor on the basis that there is would be invalid – because there is no insurable interest.
When are contractors subject to IR35 tax liability?
Contractors are only liable for tax if the original Intermediaries Legislation (enacted in April 2000) still applies.
Due to the small companies exemption, the new Off-payroll rules do not apply to contractors who work for small companies. However, the contractors' limited company is responsible for their assessments and the tax liability under the original Intermediaries Legislation.
For contractors who are members of IR35 Shield for Contractors, this includes our Tax Investigations Service, where our team will defend any IR35 investigation on your behalf, which is underwritten by a £125,000 insurance policy.
IR35 Shield neither sells nor promotes tax loss insurance products for contractors, and contractors should be mindful of the risks associated with such policies.
Summary and action points
Contractors:
- You do not need to be concerned with legislative tax risk under the new Off-payroll legislation because you do not have any.
- In insurance law, you can only buy insurance for something or someone in which you have an insurable interest. A contractor cannot buy an insurance policy for Off-payroll to protect someone else's tax liability – because there is no insurable interest for the contractor. Read more about this, including risks associated with the Managed Service Companies Legislation, in our IR35 tax loss insurance article.
- Under Off-payroll, you should be careful what indemnities and warranties you are asked to sign. Get your contracts checked by a lawyer.
Hiring firms and agencies:
- Ensure valid Status Determination Statements are issued so the tax risk correctly passes down the supply chain.
- Secure and audit your supply chains to ensure no tax avoidance schemes.
- Pay careful attention to indemnities and warranties within all contracts in the supply chain.
- Agencies: Beware of the Managed Service Companies Legislation concerning tax loss insurance.
References:
The Income Tax (Pay As You Earn) (Amendment No. 3) Regulations 2020 – 97LA to 97LH
https://www.legislation.gov.uk/uksi/2020/1150/regulation/3/made
Income Tax (Earnings and Pensions) Act 2003 – Section 688AA
https://www.legislation.gov.uk/ukpga/2003/1/section/688AA
Income Tax (Earnings and Pensions) Act 2003 – Chapter 10
https://www.legislation.gov.uk/ukpga/2003/1/part/2/chapter/10
