The HMRC webinar with 25 errors in it

By David Kirk

Are you au fait with all the new IR35 law changes that are coming in on April 6^th?  HMRC aren’t.  I watched a webinar of theirs on 5^th March and was aghast at the amount of misleading information in it, some of which was just downright wrong.

See for yourself: you can access it here.  It’s aimed at the ‘fee-payers’ – those normally responsible for operating PAYE and deducting and paying over National Insurance contributions, which will typically be agencies.

Let’s start with the webinar itself:

1. At 5:46.  ‘If the client is a public sector organisation, or a medium- or large-sized non-public sector organisation, the client will be responsible for determining employment status for tax for these engagements.’  Misleading.  This gives the impression that if the client makes a mistake, it is the client that will be saddled with the bill.  This is not so: if a client issues a status determination statement (SDS) saying that someone is outside the off-payroll rules and HMRC disagree, it is the agency who will pay.  The client has a role in this and can easily find itself with an unexpected liability if it fails to take reasonable care, but that is not the same as carrying responsibility for getting the status decision right.
   
   
   
2. At 8:08.  ‘Now contractors who work through their own PSC and provide their services to public sector organisation, or medium- or large sized non-public sector organisations, will not be responsible for deciding the employment status for tax purposes of the engagement.  It is the client’s responsibility to decide.’  Misleading.  Same objection as no. 1.  It gives the impression that the fee-payer cannot overrule the client.
   
   
3. At 15:35.  ‘It is the deemed employer that holds the responsibility for deducting the tax and National Insurance from any payment going to the contractor’s PSC and paying these over to HMRC.’  Omits something important, and wrong in the context given.  The requirement is to deducttax and NICs from the payment made by the deemed employer, which will not necessarily be the same payment as that made to the contractor’s PSC.  This is therefore true where the deemedemployer is the fee-payer, but not where it is some other party such as the client or the lowest qualifying person in the chain, which is what this passage was talking about.
   
   
4. At 23:06.  ‘Once the client has decided whether or not the rules do apply, they must set out that decision in a status determination statement, or SDS.’  Wrong.  There is no legal requirement for this, and where the client pays the intermediary directly there are no legal consequences for failure to do so.
   
   
5. At 27:55.  ‘For an SDS to be valid, it must state whether or not the contractor would be a deemed employee for tax and National Insurance purposes if they were directly engaged by the client.’  Wrong.  The law (Income Tax (Earnings and Pensions) Act 2003, section 61NA(1)) is very prescriptive here, and requires an SDS to state ‘that the client has concluded that the condition in 61M(1)(d) is met in the case of an engagement’ (or not met, as the case may be).  There is an equivalent for National Insurance.  The condition referred to is that ‘if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client’.  This is only one component in making someone a deemed employee.  This matters because one can expect agencies who are under investigation by HMRC to look for procedural reasons to pass any bills back to their clients, and saying that an SDS is not valid ought to be a highly effective way of doing that.
   
   
6. At 28:49.  ‘Agencies should expect to see outputs from HMRC’s Check Employee Status for Tax tool or other commercially available tools.’  Wrong and omits important information.  There is absolutely no reason whyemployment status needs to be determined using a tool.  Judges, who are the final arbiters of this, do not use one, and it is perfectly possible to come to a conclusion by looking at all the status tests and seeing where a particular engagement fits in.  Why else do HMRC have an Employment Status Manual over 500 pages long?  And what do you do if you are a CEST user and it says that it is unable to determine he status, which it does in about 20% of cases?  This section also fails to say that the SDS must be given by the client to the worker,which is a legal requirement: if it comes from a third party tool it must be clear that it is being issued on the client’s behalf.
   
7. At 29:54.  ‘If the SDS states that the off-payroll working rules don’t apply there is no deemed employment and payments should be made to the PSC gross.  Wrong.  This does not follow – the client might have come to the wrong conclusion in preparing the SDS.
   
   
8. At 30:10.  ‘The legislation requires clients to have a status disagreement process in place to deal with SDS disputes.’  Misleading.  There is no requirement to have a process in place, merely to consider the worker’s representations when there is a dispute and decide again, which may never happen, or happen very rarely.  This can be done ad hoc, and bearing in mind the arcane nature of the disputes that are likely to arise that may well be the best way of dealing with things.
   
   
9. At 39:30.  ‘The client therefore pays the agency £1,400, which includes the £1,000 weekly rate, plus the £200 VAT and the £200 fees.’  Wrong.  This one is a shocker coming from HMRC: in the example that they give the agency’s fees would be subject to 20% VAT as well, so the client would pay the agency £1,440.
   
   
10. At 39:47.  The slide says at this point that the agency ‘Keeps £200 fee’.  Omits important information.  This £200 fee includes the employer’s National Insurance that the agency has to pay, which will come to more than half of it (£113 in this example).  The speaker does say at 40:05 that the agency will need to pay any ‘secondary National Insurance liabilities’, but most agencies will not be familiar with the ‘secondary’ part of the terminology and are therefore likely to fail to pick this up.
    
    
11. At 45:40.  ‘Any amount treated as deemed employment earnings count as statutory payments for statutory payments purposes, so long as the contractor takes these payments as earnings from the PSC through Pay As You Earn.’  Misleading.  What is meant there is that the payments are taken as earnings through the Real Time Information (‘RTI’) system, into which PAYE payments are also put, but these payments will not be paid ‘through PAYE’ as the PAYE will have been deducted at an earlier stage.
    
    
12. Is that PAYE tax and NIs or NI Company contributions?  Answer: On payment that falls inside the OPW rules a deemed employer will need to deduct PAYE tax, employees’ and employer’s NIC and, if applicable, Apprenticeship Levy.  Misleading.  Employer’s NIC andthe Apprenticeship Levyshould be paid in addition, not deducted.  It is illegal to deduct Employer’s NICs before paying the PSC.
    
    
    At the beginning of the webinar there is a reference to questions and answers.  These were only available to those who watched live but I downloaded them (see here for the full text) and can say that there are quite a number with problematic answers:
    
    
    
13. How PSC shows payment received after IR35 deduction in PSC accounts ?  Answer: Since the deemed payment amounts have already been subject to tax and NICs, no further tax is due on those amounts or this would be double taxation.  Avoiding double taxation can be achieved in different ways depending on whether income from off-payroll working arrangements is recorded gross or net within the PSC’s accounts and whether the money is taken out of the PSC as payroll payments or dividends.  Please see page ESM10035 of our employment status guidance on GOV.UK for more detail on this: ESM10035 – Employment Status Manual – HMRC internal manual – GOV.UK (www.gov.uk).  Doesn’t answer the question.  It wasn’t about tax: it was about how to show things in the accounts.  Also it is highly doubtful that showing the receipt net in the accounts complies with s. 474 of the Companies Act 2006.
    
    
14. If we engage a worker through an agency do we have to complete an SDS.  I’m thinking that the agency would be responsible for PAYE is that correct?  Thanks.  Answer: Where a worker is contracted directly to an agency (i.e. no intermediary) this would fall under the agency regulations.  Where the contractor is engaged by the agency via their own intermediary then the off-payroll rules will need to be considered.  An SDS will only be required for off-payroll engagements.  Doesn’t answer the question.  It should also say that the agency regulations require the agency to operate PAYE where they apply.
    
    
15. If the client already operates payroll and we deem that the contractor falls under IR35 do we just have to add the contractor to our normal payroll and run on a monthly basis?  Answer: If the agency already deducts PAYE/NIC i.e. under agency regulation, then there would be no requirement to consider the OPW rules. It is important to understand what is happening in the contractual chain to determine if you have any responsibilities under the OPW rules.  Wrong.  Presuming that this is from an agency and there is no PSC involved (which are both likely given the tenor of the question), the answer is that it has to consider the supervision, direction and control test not the normal employment status test, and should tell the client that none of the conditions in s. 61N apply – that ought to be enough to get the client not to issue an SDS.
    
    
16. If there is no agency involved then the client must have contracted with the PSC. In this case does the client have to issue SDS to both the contractor and the PSC?  Answer: If there is no agency in the chain then the client is only required to send the SDS to the contractor.  Wrong.  There is no requirement to issue an SDS, and in this instance no legal consequence for the client in failing to do so.
    
    
17. Where is it documented, in Law, the definition for PSC please?  Answer: For the off-payroll working rules to apply, an intermediary can be a limited company, a partnership or an individual. Page ESM10003 of our Employment Status Manual guidance on GOV.UK goes into more detail about how a limited company or PSC may be within the scope of the rules: ESM10003 – Employment Status Manual – HMRC internal manual – GOV.UK,  Doesn’t answer the question.  There is no legal definition of a PSC in law; one is basically looking at the conditions in s. 61O ITEPA applying, although they do go slightly wider than people’s conventional understanding of a PSC.  They can apply when the worker or his associates has a shareholding in the intermediary, however small.
    
    
18. I have seen that the deemed employer can charge the Employer’s NI back to the PSC – is this correct please?  Answer: Employer’s NIC is the responsibility of the deemed employer rather than the contractor.  Omits important information.  For the deemed employer to charge employer’s NICs back to the PSC would in most circumstances be illegal.
    
    
19. Why is the Limited Company in the supply chain?  Is it deemed that Companies will continue to operate even if their operatives are deemed inside IR35?  Answer: I don’t fully understand your question I’m afraid.  The Limited Company as in the PSC?  Doesn’t answer the question.  It should be obvious that the limited company is a reference to the PSC, and the answer is that companies can continue to operate even if inside IR35.
    
    
20. If the client employs a company to administer its payroll, who is then responsible for determinations?  Answer: It is possible that a company may outsource the determination process, however the need for reasonable care to be taken when making the determinations does not move from the client in these circumstances.  Omits important information.  It is also important for the client to issue the SDS in the circumstances, otherwise (as with failure to take reasonable care) it could be lumbered with the PAYE liability.
    
    
21. We have a sister company. We’re not a subsidiary but are connected for Apprenticeship Levy purposes.  Does this make us Connected for IR35 as well?  We don’t meet 2 of the 3 criteria for small business if we combine figures from both companies, but do meet 2 of the criteria if just consider our company figures only. I think this means we are not considered a small business for IR35. I have asked HMRC but not a clear answer from them.  Answer: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10007 contains information regarding groups.  A group’s size is determined by the size of its parent company. In order to identify the size of a parent company you should aggregate the figures from all members together.  Therefore, to determine the size of a company within a group, you add together all figures of the members within the group and the outcome will apply to all members.  Doesn’t answer the question.  This looks as though it is about a case where there is no group structure, and the answer is that you have to look at the combined figures for turnover but not for the other two tests.
    
    
22. In your Deemed Employment – examples 2 & 3 the offshore agency’s margin is being subject to PAYE, not just the payment the contractor is entitled to.  Is that correct?  Answer: The agencies margin would not be subject to PAYE/NIC and would be removed when calculating the chain payment.  We will check the examples so thank you for pointing this out.  Wrong.  In these circumstances the agency’s margin is subject to PAYE and NIC deductions.
    
    
23. If a contractor is engaged via an umbrella and not a PSC, will the employer’s NI and apprentice levy be shown as deductions on the payslip from the payment made from umbrella to the contractor under OPW?  Answer: In an umbrella company engagement, it will be the responsibility of the umbrella company to make all relevant deductions.  How it wishes to show this on a payslip is a business’s decision.  Wrong.  These are not deductions – they are payments that the umbrella has to make in addition.
    
    
24. If a client takes reasonable care in an SDS but gets the answer wrong, what are the consequences for the chain?  Answer: If a client is not already the deemed employer, and has taken reasonable care and fulfilled its other duties (such as issuing the SDS), the responsibility for deducting tax and NICs and paying these to HMRC will not rest with it.  This is the case even if it turns out that the client got the decision wrong.  Omits something important.  One of the consequences down the chain is that the fee-payer (usually the agency) will have to pay the Employer’s National Insurance.
    
    
    
25. If the end client pay directly to the contractor, will they become deemed employer and deemed fee-payer (rather than the agency in the supply chain)?   Answer: If the client contracts directly with the contractor and the contractor is deemed to be inside scope of the OPW rules then the client will also be the deemed employer as they are the first and only qualifying person within the supply chain and will have to operate PAYE on any payments made to the contractor.  Wrong.  It is not clear what the role of the agency is here – whether it is in the contractual chain but asking the client to pay the worker directly, or whether it is simply introducing the contractor to the agency and charging a fee for that alone, with the client and contractor entering into a direct contract, but the answer assumes the latter and is wrong either way.  In the latter case the contract may be an actual contract of employment and the client an actual, rather than a deemed employer, but PAYE then has to be operated on normal principles and not because of eth off-payroll rules.
    
    

HMRC are doing the webinar again on 15^th April.  Why not sign up and see whether they change all this next time?