In late March and early April 2018, HMRC has been busy warning a number of staffing companies and end-users about transferring historic contractor tax liability to them. This follows a similar flurry of warnings at the same time last year (a proportion of which we have helped resolve but some of which are ongoing). We expect an even greater number of claims this time next year.
The claims relate to use of certain types of umbrella and PSC arrangements. The scenarios giving rise to these determinations 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.
What has been happening?
A number of staffing companies and end users have 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 Personal Service Companies or other intermediaries such as “consultancy companies” or “umbrella” companies.
Some Regulation 80 determinations or section 8 notices we have seen relate to liabilities arising under legislation pre-dating the 2014 Onshore and Offshore 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 PSCs which no longer exist (s.44 ITEPA 2003).
Regulation 80 determinations/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 some of the determinations we are seeing now relate to payments longer ago. In the case of NICs, a Regulation 80 determination/s8. 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 brings its claim against the-end user rather than the staffing company does not mean the staffing company is off the hook: most staffing companies have to agree to indemnify end-users in relation to this sort of tax claim.
What sort of things are triggering these 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 receives a Regulation 80/section 8 letter should immediately seek specialist legal advice.
Will there be more claims in March/April 2019?
We think March/April 2019 (already a busy time for staffing companies as they come to grips with Brexit and the likely introduction of new IR35 rules) will see a further and probably bigger surge in Regulation 80 determinations/section 8 notices against staffing companies relating to the first year of operation of the 2014 Intermediaries legislation (which further attacked offshore arrangements and sole trader arrangements).
Are indemnities enough?
Tax indemnities in standard terms with limited company contractors (including PSCs, umbrella companies and other intermediaries) should cover all losses suffered by the staffing company attributable to tax liability 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 NIC 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 in practice: if you are dealing with a “dubious” intermediary it will, by the time you want to make a claim against it, probably have ceased carrying on business, and have no assets to claim against. And it is unlikely to have reliable 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 is seeking 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 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 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.
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.
Evidence of having carried out regular and effective checks will, almost certainly become 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. It could also provide a staffing company with a fraudulent document defence under the Intermediaries legislation.
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.