The "off-payroll" rules also known as IR35 that apply to workers supplying services to clients via their own personal companies became effective on 6th April 2021. Whilst small businesses will be outside of the new obligations, medium and large companies (with a turnover of more than £10.2million or 50+ employees) must determine whether they as the end-user organisation, or someone in the labour supply chain, are responsible for PAYE and NIC deductions to ensure compliance to the new rules. Our blog below provides practical advice on carrying out due diligence on your labour supply chain.
A reminder of the Off-Payroll rules
Forming part of the Finance Act, IR35 is a tax legislation focussing on two key tax laws. It aims to ensure workers and companies pay tax and National Insurance Contributions (NIC) correctly.
Prior to 6th April 2021, when companies hired workers on a self-employed contractor or consultancy basis via a limited company, they were able to save paying Employers PAYE and NIC contributions. Under this new regime, end user businesses will be required to determine whether an individual would have been treated as an employee or not if directly engaged.
The importance of knowing your Labour Supply Chain
As IR35 is a complex area, HMRC suggest that end user organisations use the CEST (Check Employment Status for Tax) online tool on their website to help with the determination. The end user business is then required to issue the worker with a Status Determination Statement setting out the reasoning for their decision, a copy of which is also given to any agency supplying the worker if relevant.
The determination notifies the agency that PAYE and NICs should be deducted from payments to the worker’s personal service company. That information should be passed down the labour supply chain if other entities are involved, and the ultimate fee payer is liable for making the tax and NIC deductions. If HMRC are unable to collect the tax from the fee payer, the liability will pass up the labour supply chain thus encouraging the end user organisation to carry out due diligence to limit their exposure.
You may be liable for unpaid taxes and National Insurance contributions If you use agency or temporary workers or are an agency providing workers, you or one of the other parties in the labour supply chain may need to operate PAYE on the workers' earnings - you should check who needs to do this.
How to assure your labour supply chain
Businesses hiring contractors should perform due diligence to enable you to make a judgement on transactions and the integrity of your supply chain. It is also important to consider the credibility of the supply, payment arrangements and other surrounding circumstances. Using supply chain due diligence principles of check, act and review will help minimise your exposure to risks.
Due diligence applies throughout supply chains - one aim of due diligence and risk assessment is to enable the taxable person to make a judgement on the integrity of their supply chain and the suppliers, customers and goods within it, for example, you may lose the right to recover the tax paid on transactions connected with the fraudulent evasion of VAT if you fail to carry out appropriate checks.
You must decide what checks are relevant, reasonable and proportionate for your own business - when you'll carry them out, and how often. These checks will need to be more extensive in business sectors where there are greater commercial risks or vulnerability to fraud and other criminality. Completing these checks will also help satisfy a number of your legal obligations. This is particularly important if your business uses labour supplied by a third party such as an agency, contractor or sub-contractor, or if you outsource your payroll service.
As well as performing risk assessments on your own legal, financial, tax and social obligations the following due diligence principles are good practice examples (although not a definitive list) of what businesses can do to minimise risks in their supply chains:
- Know how long your supply chain is - margins become tighter with every layer of subcontracting and opportunities increase for fraudulent infiltration of supply chains so be vigilant - check that the supplier actually exists (for example, by looking for commercial features) and check details of any onward subcontracting.
- Check your suppliers' tax and legal compliance, for example, are they submitting their tax returns and payments on time, complying with legal and social responsibilities, and having reasonable procedures in place to prevent the criminal facilitation of UK and foreign tax evasion, as per the Corporate Criminal Offences brought in by the Criminal Finance Act 2017.
- Look out for your suppliers’ modern slavery and exploitation risks, for example, check for published slavery and human trafficking statements and for indicators of the Modern Slavery and Exploitation Act.
- Check the credibility of directors and verify signatories of contract negotiations and documents are accountable office holders.
- Get to know your suppliers’ workers that are carrying out services at your organisation - understand what the relationship is between the workers and the provider of the labour, for example:
- who provides the workers
- what their employment status is
- who is responsible for making sure how they are paid and how much
- if there is any indication of exploitation including modern slavery
- are they allowed to work in the UK.
Make sure your supplier is legitimate and previously compliant by considering the following:
- whether commercial features can be demonstrated and are as expected.
- checking the credibility of the directors and establishing who is in control of the business.
- checking the history of the labour supply business - if a previous business failed due to tax debts, see what has changed to prevent this happening again, and check if the supplier is now commercially sustainable.
- checking that appropriate licences are held and in order, for example, a Gangmasters and Labour Abuse Authority (GLAA) licence or a Security Industry Authority (SIA) licence.
- verifying the suppliers VAT registration details with HMRC before you use them and making regular checks of all VAT registration numbers afterwards.
Contract details to help record keeping
Make sure you keep a detailed record of all the checks you do. You may also want to consider the following contractual clauses when forming a commercial relationship with a contracted worker and/or the labour supply agency:
- adding a clause to the contract requiring your authorisation before further subcontracting to a third party, and check that this is adhered to.
- adding a clause in the contract that travel and subsistence arrangements between the workers and the labour supplier comply with HMRC requirements.
- adding a clause in the contract stopping the use of off-shore intermediaries.
- adding a clause in the contract requiring labour suppliers to show evidence of the VAT and PAYE returns filed and payments made to HMRC.
You may also want to check the following:
- Making sure the agency has complied with employment intermediary reporting requirements and get evidence of submitted reports to HMRC where they do not operate PAYE (this includes where they use an umbrella company).
- Check whether the supply chain is unnecessarily long, leaving those further down little scope for profit or meeting statutory tax obligations.
- Where workers supplied by agencies are being treated as self-employed, decide if the Agency Rules apply - agency rules mean that you need to operate PAYE as if the workers you supply are your employees.
Payment of workers
You must make sure workers are paid properly by considering:
- Checking workers are actually paid their contractual rate and that it complies with the National Minimum Wage or the National Living Wage - failure to comply with minimum wage legislation is largely driven by a series of common errors.
- Checking the Association of Labour Providers (ALP) or Gangmasters Labour Abuse Authority (GLAA) for the latest suggested hourly rates for the supply of labour - any business charging less suggests unsustainable practices.
- Taking a sample check of agency worker's pay slips to understand who is responsible for paying your workers - check whether it is who you expected.
- Checking that the PAYE reference is the right one for the business you consider to be the employer - check if your actual supplier of labour is linked to the business you hold a contract with.
If you do not undertake due diligence
The Off-Payroll reform already applies in the public sector where an individual works through their own intermediary. The off-payroll working reform from April 2021 provides HMRC with the power to recover unpaid tax and National Insurance contributions from you, or the agency you contract with in some circumstances - if for example a UK-based agency lower down in your labour supply chain fails to account for tax and National Insurance contributions payable through the PAYE system under the off-payroll working rules and there is no realistic prospect of recovering the tax and National Insurance contributions from them. This change will apply to the public, private and voluntary sectors.
You must tell HMRC about your payroll or staffing outsourcing arrangements.
If HMRC finds non-compliance or fraud in your supply chain it is likely to cost you more. HMRC is committed to tackling non-compliance, fraud and illegal working practices in labour supply chains across business sectors. You can be fined if your tax return or other tax document is inaccurate and tax has been unpaid or paid incorrectly as a result.
The new Off-Payroll IR35 rules can be difficult to navigate, so, if you need further information about the reform plans; need help implementing the IR35 changes; or would like further specific advice on conducting supply chain due diligence, please be assured you can call our Corporate Tax team in Warrington on 01925 830 830, or in our Manchester office on 0161 905 1801, for any guidance.