Guidance recently published by HMRC has confirmed that status determinations made prior to 6 April 2020 will only be valid for engagements continuing after this date if they meet the new legislative requirements to include the client’s reasons for the decision and have been passed to both the individual and any third party the client contracts with.
This could lead to tax liabilities for public sector clients if they do not take action.
Note: the off-payroll working rules define a “public authority” by reference to the Freedom of Information Act 2000; a definition that covers a range of entities in the health, government and education sectors, including many universities, and companies owned or controlled by those entities.
What is the issue?
A risk arises where the public sector client contracts with an agency, which in turn contracts with an “intermediary” (such as a personal service company). In this situation, the agency that pays the “intermediary” (the “fee payer”) is required to operate PAYE to deduct tax and National Insurance contributions (“NICs”) in accordance with the client’s determination about whether the individual providing the services is employed or self-employed for tax purposes. Broadly, if the client fails to make and communicate the status determination to the agency on or before the start of the engagement, the client becomes liable for PAYE tax and NICs arising from the arrangements.
From 6 April 2020, the client will be required to give a “status determination statement” to both the party it is contracting with and the individual providing the services, which includes the client’s reasons for reaching its decision on status. The requirement to provide reasons up front is a departure from the current rules, under which the client only has to provide reasons on receipt of a formal written request from the other party it is contracting with.
Where the client is not the “fee payer” (ie there is at least one agency in the contractual chain), the client will be liable for PAYE tax and NICs relating to the arrangements unless and until it gives a valid “status determination statement”, setting out its reasons for the determination, to both the agency it contracts with and the individual providing the services.
For existing arrangements which will continue after 6 April, public sector clients may find that liability for PAYE tax and NICs has passed back to them from the agency “fee payer” if they have not given a valid “status determination statement”, which details the reasons for the status decision, to both the agency and the individual providing the services.
What is a valid “status determination statement” (“SDS”)?
For the SDS to be valid from April 2020, the client must:
- state in the SDS whether or not the individual would be an employee or office holder, or is an office holder, for tax and NICs purposes if they were directly engaged by the client;
- provide their reasons for coming to that conclusion; and
- have taken reasonable care in coming to their conclusion.
If the SDS does not satisfy these three criteria above, it will not be valid and the client will be liable for tax and NICs arising from the engagement unless and until it issues a valid “status determination statement” to the relevant parties.
HMRC has confirmed that an accurate output from its enhanced Check Employment Status for Tax (CEST) tool (made after the tool was updated on 25 November 2019) can be used to constitute a valid “status determination statement”.
What should we do?
You must ensure that valid “status determinations statements”, that comply with the new requirements, have been provided to the appropriate parties for all engagements that involve agencies supplying the services of “intermediaries” to you, as these present a tax risk.
You may also want to:
- review all existing engagements involving “intermediaries” that will continue after 6 April 2020
- carry out a new assessment of status for each of those engagements (using reasonable care) and issue a new “status determination statement” that complies with the requirements set out above to both the individual and the other party you are contracting with.
What else do we need to know about the upcoming changes to the off-payroll working rules?
Other changes proposed to the off-payroll working rules include:
- a new requirement for clients to implement a statutory dispute resolution process, allowing the individual and the other party it is contracting with to challenge the client’s status determination. Failure to respond to such a challenge within 45 days will result in the tax and NICs liability passing back to the client from the “fee payer” (where this is not the client); and
- wide powers for HMRC to pursue the client for unpaid PAYE tax and NICs in the event that the “fee payer” fails to account for these sums.
HMRC has published new draft guidance on the changes to the off-payroll working rules, available here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10000.