PAYE OR UMBRELLA: SIDE-STEPPING IR35
- Published on March 4, 2020
IR35 barrister and CTA - Helping all corporations safely retain independent contractors with strong legal advice
- Moving forward on the umbrella or PAYE model exposes the client to the risk of retroactive demand for historical PAYE / NIC.
Clients (to use the language of the off-payroll legislation) are in many cases deciding to entirely side-step the off-payroll legislation by refusing contracts with PSC's and insisting that workers accept PAYE or umbrella arrangements instead. In some cases, clients are doing this on the back of a Status Determination Statement ('SDS'), which is somewhat otiose.
What does this mean?
The first effect is that the off-payroll legislation is no longer in scope as there is no intermediary; the worker is either an employee of the client (albeit receiving salary through a third-party payroll provider) or an employee of the umbrella company.
Where a company unilaterally declares that going forward contractors previously engaged through their PSC's will be required to agree to umbrella or PAYE models, the contractor is in a 'take it or leave it' position. Whereas IR35 status is determinable on an assessment of the terms of the engagement, if the client insists on (actual) employment, that is what they will get.
So no 'Status Determination Statement' is required (hence, 'otiose'). The client is off the hook. Job done.
Consider ESM0117 (a section from HMRC's Employment Status Manual):
"Where it is agreed that a worker who has previously been regarded as self-employed should now be treated as employed, then you will need to consider whether to pursue the employer for NICs and tax for back years." [Emphasis added].
The danger of retrospective enquiry is that HMRC will look at what the determined status is going forward and seek to apply that going back.
So where a client continues to engage contractors through their PSC's but determines that Chapter 10, Part 2 ITEPA 2003 (the private sector off-payroll legislation) applies going forward, HMRC will expect that Chapter 8 (the old IR35) will have applied in the past. Here, the risk is primarily with the contractor's PSC which was liable for the PAYE and NIC's under Chapter 8.
On the other hand, if the client demands employment going forward (actual employment, not simply deemed 'inside IR35'), then why wouldn't HMRC ask why the engagement was not always an employed one? In that case, Chapter 8 would never have applied and the client would find themselves liable to unpaid PAYE / NIC's.
If HMRC did pursue the contractor's PSC (for example, on the basis that they are an easier target), the contractor's immediate response would be that HMRC should be chasing the client. I could see that as being a very attractive argument in the First-Tier Tribunal (Tax Chamber).
Original Source - LinkedIn - PAYE Umbrella Side Stepping IR35
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