HMRC is consulting on transfer of debt regulations as part of April’s ‘IR35’ reforms. What will these mean in practice?
From 6 April this year, medium and large private sector organisations – as well as all public sector bodies – must assess the ‘IR35’ status of engagements with workers who operate through intermediaries (such as personal service companies). This will determine the payroll treatment of payments made to the contractor. Under the new regime, the obligation to operate payroll withholding will usually sit with the person that pays the contractor’s fees (the ‘fee payer').
In many cases, this fee payer will be an agency or other entity in the labour supply chain that sits between the end user of the worker’s services (i.e. the client) and the worker’s personal service company.
However, in certain circumstances, any underpaid PAYE and NIC could become the responsibility of the client, even where they have exercised reasonable care in assessing the status of the engagement and passed this to the agency.
HMRC are consulting on draft PAYE and social security regulations that allow them to transfer the debt to other entities in the labour supply chain where the fee payer defaults on its withholding obligations (the draft social security regulations also introduce the substantive off-payroll working reforms into NIC legislation).
The consultation closes on 19 February.
Under the draft regulations, if HMRC conclude there is no realistic possibility of recovering the relevant PAYE and NIC from the fee payer within a ‘reasonable period of time’, the debt transfers to the first UK entity in the labour supply chain that sits below the client – referred to in HMRC’s accompanying technical note as ‘agency one’ – assuming that agency one is not itself the defaulting fee payer.
If there is no realistic prospect of that debt being recovered from agency one, it then transfers to the client.
The debt will not transfer to any other downstream entities in the labour supply chain that sit between agency one and the fee payer.
HMRC state in their technical note that they will not exercise their power to transfer the debt where the fee payer defaults due to a genuine business failure. However, this easement is not provided for in the draft regulations.
We expect that, in order to give participants in the labour supply chain certainty, HMRC’s interpretation of ‘genuine business failure’, as well as when they consider there is ‘no realistic prospect’ of recovery of a relevant debt ‘within a reasonable period of time’, will be set out in comprehensive guidance. However, in our view this does not go far enough and an exception should be made from the debt transfer rules in circumstances where a client or ‘agency one’ has taken ‘reasonable care’ in discharging its obligations. KPMG will be making this point in representations on the draft regulations.
It is important that organisations consider the potential impact of the draft debt transfer regulations on their preparations for the new regime.
In particular clients, and entities in the ‘agency one’ position of the labour supply chain, should ensure they have adequate processes in place to secure the integrity of the downstream supply chain.
KPMG intends to submit a response to this consultation prior to 19 February.
If you would like to submit comments on the draft regulations to be considered for inclusion in our response or to talk through the implications of the draft regulations for your organisation more generally, please contact Colin Ben-Nathan or your usual KPMG contact.
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