HMRC get it right for once

Just had a look at HMRC’s consultation on off-payroll offsets https://lnkd.in/edPrZWGD.  It’s actually rather good, allowing tax due back to taxpayers to be offset against tax paid by them when they both arise from the same mistake, and allows interest to be calculated correctly automatically.

Let’s see HMRC do something similar in the case of the old IR35 rules and managed service companies. It would remedy a rank injustice in their charging interest on balances that do not exist in any meaningful economic sense

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A Tax Tribunal Win

Very pleased to have helped the NWM Group win an important case on subsistence expenses in the tax tribunal – judgment at https://lnkd.in/eCg8EftU.

This goes back to the pre-2016 rules when employers needed dispensations. NWM had been paying the Revenue’s long-approved £5 and £10 scale rates for meals, but had not been auditing them after the event. HMRC expected there always to be some form of receipt to support the fact of taking a meal at work, even though it almost invariably would not say that the amount paid was £5 or £10. For that kind of money you would usually buy your lunch from a burger van or a sandwich shop – not the easiest places to get receipts from.

Anyway, the judges said that they found themselves in agreement with our counsel’s submission that ‘if receipts were necessary irrespective of the subsistence scale rates applying, then one wonders what benefit would be derived from having the scale rates at all. Those rates were supposed to be an administrative convenience for employers, employees and HMRC. But the processes apparently demanded by HMRC might arguably be more onerous than claiming deductions against tax for expenses in the amounts substantiated by the receipts. That cannot have been what Parliament intended.’

In other words, this was a bonkers regime imposed by HMRC all along. Congratulations to David Ewart KC and Laura Ruxandu of Pump Court Tax Chambers for shedding the light of day on it.

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The autograss regime and CEST

This post is for big business readers. That is to say, for those whose group has a UK turnover of £200m or more or a balance sheet total of £2bn or more. If you’re not working for or advising one of these, you may still like to see how big business is going to tie itself in knots before it has to surrender itself to the Revenue and tell them all it knows. This may fill you with delight when you see that your competitors have to do something that you don’t, or possibly with horror at the thought of this regime coming to your company as well at some later date.

As from next April, big business is going to have to tell HMRC whenever it has adopted an ‘uncertain’ tax treatment that might have saved the company £5m or more (a drop in the ocean for companies this size). This is all described here, and ‘uncertain’ means one of three things:

1. A provision has been made in the accounts, to reflect the probability that a different tax treatment will be applied to a transaction.
   
2. Reliance has been placed on an interpretation or application of the law that is different from HMRC’s known interpretation or application.
   
3. It is reasonable to anticipate that, if a tribunal or court were to consider the way in which the amount was arrived at, there is a substantial possibility that the treatment would be found to be incorrect.
   

Now I’m not going to go through the whole gamut of uncertain tax treatment that those clever creative types in the Big Four might be advising their clients to take, as in most areas of tax I am not familiar with them. However it is I think worth taking a look at what the implications of this might be for the off-payroll regime, known to old-fashioned people as IR35. Employment status is an inherently uncertain matter and one in which there are acknowledged grey areas. (Even HMRC will agree that much if you press them hard enough, although I have rarely seen them give any leeway to taxpayers because of it.) Basically, it means that big companies are going to have to choose the most conservative treatment possible (i.e. employed status, or inside IR35) if they are going to avoid certain trouble. Some might say that they are already doing that, which I suppose is true of many large companies, but it is not true of all of them.

Criterion no. 1 above should not present too much of a problem. My observation in the days when I did company accounts – admittedly some time ago – was that clients would go to any length to avoid having to make a provision of this sort, as doing so was an advertisement to the Inland Revenue (as they then were) that the company did not think that it had a very good case – something that generally speaking the adviser would be no keener to say than the client company would be. A reason as usually found for not putting a provision in, with varying degrees of intellectual contortion required to justify this stance.

Criterion no. 2 raises some interesting questions about the role of CEST, as you can find out HMRC’s application of the law by using this well-publicised tool of theirs. Do you have to put each case through CEST in order to find this out? I don’t think that the draft legislation goes quite that far: it talks of ‘the way in which it is known that HMRC would interpret or apply the law’ (my emphasis). We know that HMRC use CEST, but we do not know the result in any individual case until we use it ourselves. So, well then, would it perhaps be better not to know? Bearing in mind how controversial CEST is, and the difficulties that some public sector bodies seem to be having in using it properly, I could hardly think of a better reason not to check out one’s own methods against CEST, which one might otherwise want to do in order to establish the risks that one is running.

HMRC’s draft guidance does in fact mention CEST as a possible trigger for this ‘uncertain treatment’ treatment, saying that it will have to be reported in a case where, to quote:

‘A large business uses “Check Employment Status for Tax” (CEST), which gives an “employed” outcome. However, additional factors mean the business considers it is appropriate not to treat their contractors as employees for tax purposes.’

It is interesting that HMRC consider that there might be additional factors to consider here, bearing in mind that they have an ‘unable to determine’ response that absolves them from giving a view in about 20% of cases. But I suspect that where a business differs from CEST on a status test, it will more often be because those in the business simply believe CEST to be wrong, rather than because of any ‘additional factors’.

However it is the third criterion that opens up a real horror show. What is a ‘substantial possibility’ that a court or tribunal might disagree? A 20% chance? Or 30%? Perhaps 40%? It is certainly below 50%. The use of the word ‘substantial’ that tax practitioners will be most familiar with is that in s. 165A of the Taxation of Chargeable Gains Act 1992, where the definition of a trading company is said to be ‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’. HMRC’s Capital Gains Tax Manual says with supreme self-assurance: ‘Substantial in this context means more than 20%’. So are we to take a 20% chance here too? Or is this different? It strikes me that it is not a counsel of excessive caution to suggest that 20% might be a reasonable hurdle to have to cross here too.

Now go and ask a barrister when was the last time he took on a case that had a lower-than-20% chance of losing. It doesn’t exist: all litigation is inherently uncertain. One barrister I once asked for odds on winning an employment status case that I thought looked pretty good came back with 55%. I said that I understood that she thought the case was pretty good too. She said that she did: 55% was the maximum odds that she would ever give in a status case.

Remember too that the criterion is that there is a substantial possibility that ‘a court or tribunal’ would find the treatment to be incorrect. That does not just refer to a judgment considered by a majority of three well-known and experienced judges in the Court of Appeal; it means any old judge in the first-tier as well. My own view is that the First-tier Tax Tribunal judges are on the whole pretty impressive, but the odd eccentric judgment does sometimes come out as we know from the number that get overturned on appeal. Basically, if taken at face value this means that any self-employed stances will need to be reported if the tax at stake comes to the stated threshold £5m or more. It is perhaps just as well that we do not have to consider what might happen in the Employment Tribunal or the County Court.

Obviously one way that big companies might decide to avoid this is to engage agencies with a view to making them responsible for operating PAYE. As agencies are usually not that big (although one or two are), this might well work, but is this really desirable? And for agencies that do exceed the thresholds, what are the implications for them? They are unlikely to have any notion as to whether the tax treatment is uncertain or not, as they are not generally aware of how the status criteria apply to individual cases – that is the whole point of making clients produce status determination statements, so that the agencies can be told what to do. Again it is the third criterion that risks tripping them up.

So it’s time to prepare for this grass-yourself-to-the-cops regime. When does it start? Too bad – you may well be already in it. It is going to apply to the first ‘relevant return’ due after 1st April 2022. PAYE returns are of course submitted monthly, and the relevant return is the last one in your accounting period. So if you have a June year end, you will need to file your report along with your PAYE full Payment Summary for the period ending June 5th 2022, and will need to include any uncertain treatments adopted in any of the twelve monthly returns leading up to that point, i.e. from 6th June 2021.

I mentioned above that some public sector bodies appeared to be having difficulty using CEST properly, so are they included in this regime too? No such luck – this only applies to companies and partnerships. Maybe HMRC feel that they can monitor them anyway.

David Kirk.
3rd September 2021

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David Kirk discusses the IR35 reforms with Daniel Barnett

Watch David Kirk in discussion with the famous employment barrister Daniel Barnett.  IR35 has suddenly become interesting to employment lawyers.

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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?

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