At ET4B (and sad though it seems) we have been ‘eagerly’ anticipating some updates and clarification from HMRC in respect of the new withholding and reporting obligations for employment intermediaries (i.e. employment businesses or agencies). It is only very recently that the final reporting Regulations have been published.
Our overall impression remains that HMRC still hasn’t done enough to clarify its interpretation in some areas, particularly as regards how the rules may affect Personal Service Companies (PSCs). Anyway, our current understanding of the new withholding and reporting rules (insofar as they affect most UK agencies), can be briefly summarised as follows:
– There has to be client involved, which in turn pays an intermediary for the service (i.e. if the agency simply hires and pays for a service itself without passing the costs to a client, this payment would be outside the new rules).
– Also an individual (worker) must personally provide services to the client.
– If these tests are satisfied, the agency must apply PAYE/NIC on all worker payments, unless it can be shown that either:
- The manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, by any person (this is a very difficult test to meet), or:
- That any remuneration receivable by the worker already constitutes employment income. HMRC would generally accept payments made to a bona fide UK PSC falls within this second exception.
– Payments which fall within either of the previous two exceptions must then be included within the new quarterly reports, which are to apply from 06/04/15.
HMRC has now confirmed that PSCs would be expected to be included within the quarterly reports issued by the ‘first tier’ intermediary employment business, and this does raise some concerns. We do feel that HMRC has been somewhat disingenuous in its earlier statements here. HMRC had stated consistently that PSCs were not the direct target, whilst introduction of the additional legislation was being discussed. The new quarterly reports will now inevitably provide HMRC with a rich vein of additional data with which to consider each PSC’s IR35 compliance position (i.e. this assumes there is no PAYE/NIC failure for the agency, which itself is not absolutely clear given the limited guidance issued by HMRC).
What do ‘first tier’ agencies have to do now?
We would suggest that employment businesses i.e. those that are the ‘first tier’ below the client in any engagement chain, would need to:
- Review their contractor take-on processes, ensuring that what is and what isn’t a PSC is recognised fully (if the organisation is not a genuine PSC, there may be not just a reporting obligation, but a PAYE/NIC withholding obligation as mentioned above). This represents a challenge because, amongst other things, HMRC has not clarified fully what it regards as a genuine PSC.
- If the contractor is not a PSC (e.g. it is an umbrella payroll) a full and robust review of the payment processes adopted by that organisation (including any subsequent contractor in the engagement chain) would be warranted. This is because, if the ‘umbrella’ etc. defaults on its obligations and doesn’t account for PAYE/NIC, the first tier agency will now be liable under the new rules.
- Include the payments to PSCs (and any other payees e.g. umbrella payrolls) in the new quarterly returns. These returns are expected electronically, and the latest template supplied for these reports is available on the HMRC website.
- Recognise the additional IR35 risk to the contractor that the new quarterly reporting obligations may present. Any other factors which can therefore be introduced or clarified to create reduced IR35 risk for a PSC may help to allay contractor concerns.
What do clients and service end-users have to do?
Most of the obligations under the new rules would be placed on the first tier agency. However as a minimum the hirer of the service should review contracts with those agencies, e.g. to ensure that the agency is contractually required to hire and pay the worker (i.e. so that the agency will clearly have the obligation under the new rules). If there is no agency involved then the hirer would itself have to undertake a proactive ‘due diligence’ approach when taking on any new contractor. Amongst other things the hirer would want to be comfortable that all parties being hired are UK registered business. There must be no suggestion of the payee (or indeed anyone lower down in the contractual chain) being based overseas (and perhaps paying workers offshore for work performed in the UK).
In summary, the new rules do present a substantial additional compliance burden, primarily for agencies but also potentially for hiring organisations. We do not feel HMRC has helped here, i.e. the department has failed to provide sufficient and clear enough advice which would assist fully compliant businesses.
Although genuine UK-based PSCs are unlikely to create direct PAYE/NIC obligation for the hirer or the agency, once PSC contractors become fully aware of any potential increased IR35 risk to their own business, we can expect additional focus on those IR35 obligations. If you require assistance in these complex matters, e.g. in reviewing contractor take-on processes and policies, or reviewing actual contractual terms and working practices (i.e. not just written contracts) in order to minimise these IR35 risks more effectively, please of course contact ET4B.