HMRC set to issue latest Regulation 80 determinations targeting MSPs, staffing companies and end-users: could you be at risk?

Written on 6 Feb 2019

This March/April HMRC are likely to issue tax claims (known as Regulation 80 determinations) against some staffing companies and end-users. We saw the same thing happen this time last year. The timing of the claims is linked to HMRC's time limit of 4/6 years being about to expire since the end of a relevant tax year (so HMRC rush each March to get their claims in on a protective basis). The claims we were aware of in 2017 and 2018 (a proportion of which we have helped resolve but some of which are ongoing) related to the use of certain types of umbrella and PSC arrangements including hidden offshore and sole trader arrangements.

Although most claims are likely to relate to the pre-2014 agency worker and offshore intermediaries tax rules, we may start to see a number of claims this year under the new Intermediaries legislation which came into force in April 2014. This ground-breaking legislation was introduced to remove loopholes in the earlier legislation and, in theory, makes it easier for HMRC to bring tax claims against staffing companies for the use of sole trader or offshore arrangements – including where the staffing company was unaware that the workers were working through such an arrangement. Liability can, for example, arise where unbeknownst to the staffing company an umbrella company has paid people offshore or engaged/paid them on a self-employed rather than employed basis.

These claims are fact-specific and vary from case to case, but they highlight the importance of carrying out regular and effective spot checks on PSCs, umbrellas and other intermediaries.

For most staffing companies this will involve doing significantly more than they have done in the past to check out how their supply chain works in practice. We explain a bit more about this below.

How do these HMRC claims work?

In each of 2017 and 2018, a number of staffing companies and end-users received so-called Regulation 80 determinations and section 8 notices from HMRC relating to the non-payment of PAYE and NICs in respect of “employment income” earned by contractors working via PSCs or other intermediaries such as “consultancy companies” or “umbrella” companies.

To date, most of the Regulation 80 determinations or section 8 notices we have seen relate to liabilities arising under legislation pre-dating the 2014 Intermediaries Legislation, seeking to transfer liability for PAYE and NICs to the staffing company or end-user under the pre-2014 overseas employer/host employer rules (s.689 ITEPA 2003 and para 9, Schedule 3 of the Social Security (Categorisation of Earners) Regulations 1978). Other determinations and notices relate to post-2014 payments to contractors operating via PSCs which no longer exist (s.44 ITEPA 2003).

Regulation 80 determinations and section 8 notices can be issued at any time (usually) within four years (for PAYE) of the end of the tax year within which the payment was made. But where a staffing company has been careless, HMRC can assess the previous six years for PAYE, meaning that some of the determinations we are seeing now relate to payments longer ago. In the case of NICs, a Regulation 80 determination/section 8 notice can be issued at any time (usually) within six years of the end of the tax year within which the payment was made.

And of course, just because HMRC bring their claim against the-end user rather than the staffing company does not mean the staffing company is off the hook: most staffing companies will have agreed to indemnify end-users in relation to this sort of tax claim. End-users typically expect staffing companies to explain and assist them in dealing with these claims, often asking for details of what checks were carried out.

What sort of things triggered these older actions by HMRC?

The scenarios giving rise to these determinations and notices include:

  • staffing companies that have inadvertently paid a PSC which doesn’t exist (having been struck off), such that really the staffing company is paying a sole trader; and
  • staffing companies that have, unbeknown to the staffing company, paid an intermediary which acts as a “front” for an overseas employment scheme. Such schemes typically involve a secondment arrangement and/or payment by way of loans rather than salary, similar to the K2 scheme, which famously was used by Jimmy Carr.

Anyone who has received, or whose client has received, a Regulation 80/section 8 letter should immediately seek specialist legal advice.

Will there be more claims in March/April 2019?

March/April 2019 may see a further and probably bigger surge in Regulation 80 determinations/section 8 notices against staffing companies. That is because it will be four years from the end of the first year of operation of the 2014 Intermediaries legislation

That legislation allows HMRC to assess "Intermediary 1" (being the entity with the contact with the end user, such as a MSP or staffing company) of any UK-based contractor supplied via that entity has been engaged via an offshore arrangement or on a sole trader (non-employed) basis. This liability would typically arise where an umbrella company or other intermediary is paying contractors as sole traders on a gross of tax and NICs basis. This could include CIS subcontractors even if they are paid under the CIS because here is no payment of employer's NICs.

To avoid liability, "Intermediary 1" would need to prove that no supervision, direction or control was exercised by any person over the manner in which the work was done by the contractor. This is a much harder test for the industry than the IR35 tests – the burden of proof is on Intermediary 1 and these negatives are notoriously hard to prove. The contractor is deemed to be an employee for tax purposes unless Intermediary 1 can prove there has been no such supervision, direction or control. And the size of potential liabilities can be very significant. If they have, for example, engaged 10 contractors at £50,000 per annum each via an intermediary who they thought was paying the contractors as PAYE employees, but was not, they may face a £300,000-£500,000 bill for each year the contractors worked via that intermediary.

Are indemnities enough?

Tax indemnities in standard terms with PSCs, umbrella companies and other intermediaries can be drafted to cover all losses suffered by the staffing company attributable to tax liabilities, including any liability which is transferred to or assessed as being the liability of the staffing company or end client: not just in relation to non-payment of tax and NICs by the PSC or other intermediary. Terms should also include a right to withhold payment pending HMRC determination of an assessment.

But those indemnities will not in many cases be of any assistance: if you are dealing with certain types of intermediary they may, by the time you want to make a claim against they, have ceased carrying on business, and have no assets to claim against. And they are unlikely to have full insurance cover for this sort of risk.

So, how can you minimise the risk of these claims?

Even if you have not been unlucky enough to receive a Regulation 80/section 8 letter, the fact that HMRC may also seek to enforce against users (as well as suppliers) of contract workers in this way, and the fact the end-users will be aware of this risk and look for reassurance that all is “safe” in the supply chain, underlines the importance of carrying out, and being seen to carry out, regular spot-checks on PSCs, umbrellas and other intermediaries to whom payments are made in respect of contractor services.

The necessary checks must go beyond an initial check on the existence, VAT registration and credit status of the intermediary when you first deal with it; and a requirement that any umbrella fills in a “self-certification” questionnaire and/or is a member of a trade association. Those actions are of use for some purposes but will not be enough to establish a defence to these claims.

What is now required, in our view, is for staffing companies to carry out a range of regularly repeated spot-checks on how and where the workers are actually paid. There is a relatively simple methodology to this and we urge all staffing companies to adopt these measures as soon as possible.

And if you or your MSP or end-clients receive a Regulation 80/section 8 letter relating to Intermediaries legislation liability, you should immediately seek specialist legal advice to see what defences may be available, and what actions can be taken to minimise risk.

Other developments requiring increased checks on the supply chain

Following the introduction of the Criminal Finance Act in September 2017, staffing companies are required (if they want to have a CFA defence) to have reasonable procedures in place to prevent the facilitation of tax evasion. Staffing companies who are caught by the CFA can face an unlimited fine and a criminal record.

These penalties can arise where a contractor evades tax and the commissioning of that offence is criminally facilitated by a third party (the “facilitator”) who is “associated” with the staffing company. In a staffing situation, the facilitator might be an accountant or overseas payroll partner or umbrella company to whom referrals are often made or who is on a preferred supplier list and who, unbeknownst to you, has an illegal structure in place to increase the take home pay of workers. If that facilitator is associated with the staffing company (as a regularly used umbrella company supplier or payroll partner or regularly used accountancy firm is likely to be deemed to be), the staffing company will be guilty of the new offence.

The only defence for the staffing company will be where it can show it has put in place reasonable preventative procedures, including regular spot-checks on the supply chain.

The same checking process should minimise the risk of liability under the November 2017 POTAS regime relating to "enablers" of tax avoidance.

Evidence of having carried out regular and effective checks is already becoming a due diligence issue in major staffing contracts with large end-users – they will be part of the procurement exercise – and on any company sale or private equity investment.

Companies with major contract renewals about to commence or preparing for exit or seeking investment therefore need to ensure that they can demonstrate that they have effective checking processes in place to limit contingent tax debt transfer risk both under the new and old tax rules for themselves and for their end-user clients.