This blog follows on from my earlier blog, of November 2019, click here to go to it for a summary of the position then.
In late September 2020 HMRC issued some guidance which sets out when they will hold end users liable for unpaid IR35 tax where the intermediary doesn’t pay the tax it should have. These new rules come into force in April of Next Year (2021).
Here are links to the two pieces of guidance that I think are the most useful:
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10001a
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10031
The following points are worthy of note:
- To avoid the risk of a transferred tax debt liability, end users who use personal service company contractors (PSCs) are expected to carry out checks down the supply chain.
- End users are already liable if they fail to use reasonable care in issuing a Status Determination Statement (‘SDS’) or in dealing with challenges.
- The new guidance extends that liability. It provides that the end user can be made liable where the Fee Payer does not pay the tax due. This could be where the Fee payer is insolvent (eg in liquidation) or dissolved, or where HMRC believe there is no realistic prospect of recovering the debt from the Fee Payer within a reasonable period of time.
- The new guidance gives HMRC the power to recover the money from ‘Relevant Parties’ – these can be the first entity in the supply chain or the client (the highest person in the contractual chain). Interestingly neither of these can appeal if the Tax Tribunal decides the debt is due.
- HMRC are setting up special teams to follow this money.
- HMRC say they will not try recover the money lost if the failure to pay is because of the Fee Payer’s genuine business failure / insolvency. But they can where the failure to pay is a result of compliance failings by the Fee Payer or there has been tax avoidance – this could include those circumstances where the intention of liquidation was to avoid payment of tax and NIC, or where there have been several business failures.
In summary, HMRC is imposing an obligation on organisations in the supply chain to carry out checks below them with a view to reducing tax leakages to the Treasury, saying that if they don’t carry out the right level of checks, then they can be held liable to pay the tax lost. This legislation has quite far reaching effects, I can see companies being forced into liquidation through no real fault of their own.