Draft Employment Status Manual Updates

[IRMe]

ESM10015

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: client-led status disagreement process
This is a draft and may be subject to change
Section 61T ITEPA 2003
Regulation 20 Social Security Contributions (Intermediaries) Regulations 2000
The legislation requires clients to have a status disagreement process in place to deal with disputes of Status Determination Statements (SDS) by workers and deemed employers. An agency who is not the deemed employer (see ESM10017) within a contractual chain does not have the right to use the client-led disagreement process.
As a minimum the legislation requires the client to:
• Consider the worker's and/or the deemed employer's representations. These representations could be made verbally or in writing.
• Respond to the worker and/or the deemed employer's representations within 45 days beginning with the day the representations are received, not from when
the SD$ was issued.
• Inform the worker or deemed employer that they have considered their representations and that they have decided that their original SDS was correct and
provide reasons, or Inform the worker and deemed employer they have considered representations and decided the original conclusion was wrong, provide a new SDS and state
that the previous SDS is withdrawn.
• Take reasonable care in making any new SDS and ensuring it contains the reasons for reaching that conclusion (see ESM10013 (Page not found - 404 - GOV.UK
manuals/employment-status-manual/esm10013)).

It is up to the client to decide the appropriate people within the organisation to deal with disputes. The client could put in place a process to ensure the right person within the organisation receives any representations from workers. For example, by asking that representations are made to the person who issued the original SDS to the worker.
If the client does not comply with the minimum requirements of the status disagreement process, the responsibility for the deduction of tax, NICs and apprenticeship levy, and paying these to HMRC will transfer to the client for further payments. However, this is subject to the fraudulent document provisions in section 61V and Regulation 22 (see ESM10023).
The worker's or deemed employer's representations should contains reasons why they disagree, so the client has sufficient information to consider the representations.

Representations can be made at any time. However, the client is only required to respond to representations made during the course of the engagement and before the final chain payment is made in relation to that engagement. The client is not obliged to respond to representations made outside of this timeframe.
If a client receives representations against a SDS prior to 6th April 2020, the client may wish response to these representations to ensure all parties are certain on their obligations as early as possible. However, if by 6th April 2020, the worker or fee-payer has not received a response to their representations, HMRC recommend that the representation is re-submitted to ensure that the client-led disagreement process, coming into effect from 6th April 2020, is in place
Where the original determination was that the rules apply, the deemed employer remains responsible for the deduction of tax, NICs and apprenticeship levy throughout the status disagreement process. This remains the case unless, and until, the client decides the worker does not fall under the rules. Equally if the original determination was the rules do not apply, this can be followed unless, and until the client decides the worker falls within the rules.
Where the client-led status disagreement process leads to a different conclusion, corrections should be made, in the first instance, through payroll. For example, where a worker was deemed inside the rules so deductions made, corrections can be made through the deemed employer's payroll and the worker reimbursed.

[IRMe]

ESM10016
DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: duty for client to withdraw SDS if it ceases to be medium or large
This is a draft and may be subject to change
Section 61TA ITEPA 2003
Regulation 20A Social Security Contributions (Intermediaries) Regulations 2000
Where a client that has provided a Status Determination Statement (SDS) no longer qualifies as medium or large (see ESM10006 (Page not found - 404 - GOV.UK manuals/employment-status-manual/esm 10006)) for the coming tax year, it must provide a further statement to the worker and deemed employer (where applicable). This must be done prior to the beginning of that tax year stating that it no longer qualifies as medium or large and confirm that the SDS is withdrawn from the start of the next tax year.
Payments made in the period prior to the client ceasing to be medium or large will still be subject to Chapter 10. Payments made after the start of the next year, even if services were provided before the start of that tax year, will no longer be considered by the rules as the non-public sector client is now classed as small.
Workers providing their services through an intermediary for that client in the next tax year will have to consider whether the intermediaries legislation at Chapter 8 Part 2 ITEPA 2003 applies (see ESM8000 (ESM8000 - Employment Status Manual - HMRC internal manual - GOV.UK))
If the client fails to inform the worker and deemed employer that it is now small prior to the beginning of the tax year, they will be treated as medium or large for the coming tax year and will have the responsibility for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC.

[IRMe]

ESM10017

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: off-payroll working and the contractual chain
This is a draft and may be subject to change
Section 61N Chapter 10 Part 2 ITEPA 2003
Regulation 14 Social Security Contributions (Intermediaries) Regulations 2000
Where the conditions in ESM10001 (Page not found - 404 - GOV.UK ESM10003 (Page not found - 404 - GOV.UK manuals/employment-status-manual/esm 10003); ESM10011 (Page not found - 404 - GOV.UK ESM10012 and ESM10013 (ESM10013 - Employment Status Manual - HMRC internal manual - GOV.UK) are met, it is necessary to identify the chain, of two or more persons, where;
• The highest person in the chain is the client,
• The lowest person in the chain is the intermediary, and
• Each person in the chain above the lowest makes a chain payment to the person immediately below them in the chain.
Note - So the lowest person in the chain for the purposes of the off-payroll working rules purposes is not the worker, it is the worker's intermediary.
The fee-payer is the person in the chain immediately above the lowest and is treated as making to the worker, and the worker is treated as receiving, a payment which is to be treated as earnings from an employment. This is subject to certain rules if the fee-payer is not the client and is not a qualifying person.
Subject to the legislative conditions explained at ESM10011 (ESM10011 - Employment Status Manual - HMRC internal manual - GOV.UK) to ESM10013 (ESM10013 - Employment Status Manual - HMRC internal manual - GOV.UK) and ESM10015 (https://www.gov.uk/hmrc-internal-man...anual/esm10015), if there is no person in the chain below the highest and above the lowest who is a qualifying person, then the client is the deemed employer and responsible for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC. Otherwise the deemed employer is the person who;
• Is above the lowest,
• Is a qualifying person, and
• Is lower in the chain than any other person in that chain who is above the lowest and is a qualifying person
A qualifying person is one who:
• has been given a status determination statement by the person immediately above them in the chain, which has also given by the client to the worker by the
client.
• is resident in the United Kingdom or has a place of business in the United Kingdom, is not a person who is controlled by—
• the worker, alone or with one or more associates of the worker, or
• an associate of the worker, with or without other associates of the worker, and
• if a company, is not one in which
the worker, alone or with one or more associates of the worker, or
• an associate of the worker, with or without other associates of the worker,
has a material interest (within the meaning given by section 51(4) and (5)) ITEPA 2003.
See examples below for how this works in three separate contractual chains
EXAMPLE ONE
End-Zone Ltd, a medium/large sized client, contracts with Field Goal Ltd, a recruitment agency, to provide the services of a worker (Jane) who operates through her own PSC (Jane Ltd) and is paid by Field Goal Ltd on a monthly basis upon production of an invoice. Field Goal Ltd has a place of business in the UK. End-Zone Ltd is the client. Field Goal Ltd is the fee-payer and a qualifying person.
The role which Jane will fill is judged to be caught by the off-payroll legislation by End Zone Ltd. End-Zone Ltd should give the Status Determination Statement to Jane and Field Goal Ltd. Field Goal Ltd is responsible for deducting tax and NICs from the payments and paying these to HMRC.
EXAMPLE TWO
Readstone County Council, a public authority, contracts with Workers 4 U Ltd, a recruitment agency, to provide the services of a worker (Emile) who operates through his own PSC (Emile Ltd). Readstone County Council determine Emile is subject to the off-payroll working rules and issues a SDS to Workers 4 U Ltd and to Emile.
Emile also has another PSC he controls called Emile 2 Ltd. Rather than Emile Ltd contracting with Workers 4 U Ltd, Emile 2 Ltd contracts with them. Emile 2 Ltd then contracts with Emile Ltd for the services of Emile. The party in the chain directly above the workers intermediary (Emile Ltd) is therefore Emile 2 Ltd, so Emile 2 Ltd is the fee-payer. However as Emile has a material interest in Emile 2 Ltd, it is not a qualifying person and, therefore, is not responsible for operating PAYE.
Workers 4 U Ltd is therefore the lowest qualifying person in the contractual chain and is the deemed employer. Workers 4 U Ltd is responsible for operating PAYE as
if they were the employer of Emile.
EXAMPLE THREE
Magpie Ltd, a medium/large sized client, contracts with Redmen Ltd, a recruitment agency, to provide the services of a worker. Redmen Ltd has a place of business in the UK. It contracts with International Workers Ltd, an overseas agency, who provide the services of Alison to Magpie Ltd. Alison operates through her PSC, Alison Ltd. International Workers Ltd is contracting with Alison Ltd for Alison's services and pays on a monthly basis upon production of an invoice. The role which Alison fills is judged to be caught by the off-payroll legislation. Magpie Ltd should give the Status Determination Statement to Alison and Redmen Ltd.
In this contractual chain the lowest party above the workers intermediary is International Workers Ltd as it is them contracting with Alison Ltd. International Workers Ltd are the fee-payer but they are not a qualifying person as they are not UK resident nor have a UK place of business, and so are not responsible for operating PAYE. The lowest qualifying person in the chain is Redmen Ltd, and so they are the deemed employer and are responsible for operating PAYE as if they were the employer of Alison.
If this was a longer contractual chain where there was another agency, say UK Ltd, between International Workers Ltd and Alison Ltd, and that agency was a qualifying person, the outcome would be that UK Ltd are responsible for operating PAYE. This is because they are the lowest qualifying person in the contractual chain and are a qualifying person. However, UK Ltd would only become a qualifying person when International Workers Ltd passes down the SDS to it.

[IRMe]

ESM10018

DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: responsibilities of agencies and other parties in the chain
This is a draft and may be subject to change
Section 61N (TEPA 2003
Regulation 14 Social Security Contributions (Intermediaries) Regulations 2000
Agencies and other parties in the contractual chain (collectively referred to as 'agencies') will have responsibilities under the off-payroll working rules. Agencies should check who they contract with so they know what the labour supply chain looks like. Where the agency sits in the contractual chain will determine the extent of any responsibilities. All agencies in the chain will have the responsibility for passing on the SDS (ESM10012 (Page not found - 404 - GOV.UK manual/esm10012)) if there are other persons between them and the worker's intermediary in the contractual chain. If an agency is the last qualifying person (ESM10017 (ESM - Employment Status Manual - HMRC internal manual - GOV.UK 10017)) in the contractual chain they will be responsible for deducting tax, NICs and apprenticeship levy from the deemed direct payment and paying them to HMRC.
Agencies will not be responsible for determining the status of a worker, this rests with the client. If the client subcontracts the determination of worker status, or the production of the SDS, it will remain responsible for ensuring the accuracy of the determination and that the SDS is passed to the parties they are responsible for passing the SDS to.
Where an agency in the chain is not the lowest qualifying person above the worker's intermediary (ESM10016 (Page not found - 404 - GOV.UK status-manual/esm10016)), on receipt of the Status Determination Statement (SDS) they should provide it to the next person in the chain. If they do not, the responsibility for deduction of tax, NICs and apprenticeship levy and paying these to HMRC will rest with them, as the person below them in the chain will not be a qualifying person as they have not received the SDS.
Where an agency in the chain does not receive the SDS from the person above them in the chain, they are not a qualifying person, and will not have the responsibility for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC.
In more complex chains where there are offshore agencies involved, UK agencies will need to be aware that those offshore agencies are not qualifying persons. If the only agency below the UK agency is offshore, the UK agency is the lowest qualifying person. If an offshore agency sits between two UK agencies, the first UK agency will be the only qualifying person until the offshore agency passes the SDS to the lower UK agency. In other words, the first UK agency will need to ensure the other UK agency receives the SDS. Simply passing the SDS to the offshore agency will not move responsibility away from it.
Where an agency receives the SDS, which concludes an employment relationship, and they would be classed as the deemed employer (ESM10017 (ESM - Employment Status Manual - HMRC internal manual - GOV.UK 10017)), they must operate PAYE (See ESM10019 (Page not found - 404 - GOV.UK manuals/employment-status-manual/esm 10019)) to deduct tax, NICs and apprenticeship levy and pay these to HMRC.
The conditions about size only apply to clients. The size of the agency, fee-payer/deemed employer is irrelevant in determining whether the off-payroll working rules apply or not, so a small-sized fee-payer will still be responsible for applying the off-payroll working rules, even if they are not medium or large.

[IRMe]

ESM10022

DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: information to be provided by workers and consequences of failure
This is a draft and may be subject to change
Section 610 Chapter 10 Part 2 ITEPA 2003
Regulation 21 Social Security Contributions (Intermediaries) Regulations 2000
This section applies to engagements where the conditions set out at s61M ITEPA 2003 are met, and so the off-payroll working rules will apply to the engagement. The conditions are:
• An individual ("the worker') personally performs, or is under an obligation to personally perform, services for another person ('the client'), who is a public
authority (see ESM10005 (ESM10005 - Employment Status Manual - HMRC internal manual - GOV.UK)) or a medium or large-sized organisation (see [ESM10006 (ESM10006 - Employment Status Manual - HMRC internal manual - GOV.UK) - ESM10009 (Page not found - 404 - GOV.UK manual/esm10009)]), under arrangements involving an intermediary in circumstances such that if the contract had been made directly between the client and the worker then the worker would be;
• Regarded as an employee of the client or the holder of an office under the client; or the worker is an office-holder who holds that office under the client and
the services relate to that office.
• the services are provided not under a contract directly with the client but through a third party (known as an intermediary)
If this is the case, the worker must tell the person who is making the deemed direct payment whether or not the intermediary they are working through, is one to which the off-payroll working rules apply to. In other words, the worker must tell the deemed employer (see ESM10002 (Page not found - 404 - GOV.UK status-manualesm10002)) if the conditions of liability are met. The conditions of liability, explained in ESM10003 (Page not found - 404 - GOV.UK status-manual/esm10003), set out certain conditions an intermediary must meet to be within scope of the rules. For example, if the intermediary is a company, the worker must have a material interest in that company.
If a worker does not tell the deemed employer this information, the legislation works to treat the intermediary they work through as one subject to the legislation. The conditions explained at ESM10003 (https://www.gov.uk/hmrc-internal-man...anual/esm10003) are therefore treated as met. Therefore, if the worker does not believe their intermediary is within the scope of the rules, they must inform the deemed employer so deductions are not made.
The worker can inform the deemed employer in any way they choose to.
If the worker does not believe any of the conditions are met, they will be subject to deductions until they tell the deemed employer why they don't meet the conditions. This is because the conditions are treated as met until the worker says otherwise.

[IRMe]

ESM10029

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: how the worker accounts for and reports monies drawn from their intermediary
This is a draft and may be subject to change
Where the worker draws remuneration or dividends from their PSC, this approach can be used to report information for tax and NICs purposes. The worker's intermediary (e.g. the PSC) will need relief against its payroll liability if Chapter 10 ITEPA 2003 / Part 2 SSCIR 2000 have been applied.
Remuneration
Remuneration (i.e. a salary) drawn by the worker from their PSC will be free of PAYE tax and NICs up to the level of the deemed direct payment where that remuneration can reasonably be taken to be for services of that worker to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation (see ESM10024 (ESM10024 - Employment Status Manual - HMRC internal manual - GOV.UK)). This only applies to payments to the worker who performed the services subject to the off-payroll working rules. Every time a payment is made to the worker from the PSC, it should be reported to HMRC as a non-taxable and non-NlCable payment on the Full Payment Submission (FPS) as part of the standard payroll reporting process, using box 58A.
The worker will only show taxable pay on their self-assessment return on the employment pages under the deemed employment with the deemed employer. They do not have to also record the non-taxable remuneration from their PSC on the SA return.
For a worker to claim statutory payments they must do so through their intermediary. To be eligible to claim statutory payments the worker must be paid salary through their intermediary in the way explained in this section. Therefore, they will need to pay a salary through payroll and report it on a FPS using box 58A if they wish to claim statutory payments.
Dividends
If the worker is remunerated via a dividend from their PSC, this will also be tax free up to the level of the deemed direct payment, where the dividend can reasonably be taken to be for services for the worker to a public authority or medium or large-sized organisation not in the public sector. This only applies to dividends paid to the worker who performed the services subject to the off-payroll working rules. This dividend does not need to be returned on the worker's self-assessment return.
The worker will only show taxable pay on their self-assessment return on the employment pages under the deemed employment with the deemed employer. They do not have to also record the non-taxable dividends from their PSC on the SA return.
As dividends are not deductible when computing income for corporation tax purposes, the PSC is entitled to relief during the calculation of taxable profits to ensure corporation tax is not taken from already taxed income, under section 141A CTA 2009.
Further information on CT accounting can be found at ESM10035 (ESM - Employment Status Manual - HMRC internal manual - GOV.UK 10035).
EXAMPLE
A worker, David, receives an amount of £4,200 each month from his PSC, David Ltd, which consists of £1,000 salary and a £3,200 dividend. David receives 12 monthly payments within the tax year.
David Ltd receives £5,400 per month (including £1,200 VAT) from the client. This comprises £7200 less deductions of £1,400 PAYE tax and £400 primary NICs.
The payment of £4,200 David receives from David Ltd could reasonably be taken to represent remuneration for services provided by David to the client. The amounts are therefore covered by the available offset of the Deemed Direct Payment (ESM10024 (ESM - Employment Status Manual - HMRC internal manual - GOV.UK 10024)), so no further PAYE / primary NICs deductions are due to be made by David Ltd on those amounts. If the PSC has other sources of income, they may subject to PAYE tax and Class 1 NICs deductions.
Annually David receives;
webcache.googleusercontent.com/search?q=cache:Page not found - 404 - GOV.UK...
1/2
04/02/2020
ESM10030 - Employment Status Manual - HMRC internal manual - GOV.UK
£12,000
remuneration from David Ltd of 12 x £1,000
dividends from David Ltd of 12 x £3,200
£38,400
£50,400
Annually David Ltd receives;
£64,800
total fees from the client of 12 x £5,400 including an amount of VAT of 12 x £1,200
(£14,400)
£50,400
PAYE deducted at source by the client 12 x £1,400
£16,800
Primary NICS deducted at source by the client 12 x £400
£ 4,800
£21,600
On David's self-assessment tax return he will include;
Employment Page 1 (the client)
Box 1: Pay from this employment, before tax taken off
£72,000*
Box 2: UK tax taken off
(£16,800)**
*This is the £50,400 received by David Ltd PLUS the £21,600 deductions made by the medium/large-sized client.
** This is the £16,800 PAYE deducted at source by the medium/large sized client.
Primary NICs are not recorded on the SA return, so only the amount of tax should be inputted into 'Box 2', as illustrated above. They will form part of the accounts of David Ltd when using the gross accounting method (see ESM10035 (ESM10035 - Employment Status Manual - HMRC internal manual - GOV.UK)) and be included in the full payment submissions the deemed employer makes to HMRC through its payroll.
For Universal Credit (UC), the amount of earned income includes deemed earnings. Therefore deemed earnings from the off-payroll working rules will be included in UC calculations.

[IRMe]

ESM10031

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: recovery from other persons – how it will be applied
This is a draft and may be subject to change
Where HMRC is satisfied that there is no realistic prospect of recovering the tax, NICs and apprenticeship levy liabilities due from the fee payer/deemed employer, HMRC may decide to recover the debt from other persons; this could be the first agency in the chain (the agency the client contracts with) or the client.
In these circumstances, HMRC would first look to recover the liability from:
• Agency 1, if agency 1:
• Exists;
• Is a qualifying person; and
• Is not the fee-payer
• The client, if:
• Agency 1 is the fee-payer; or
• Agency 1 is not a qualifying person; or
• The liability cannot be recovered from agency 1 for similar reasons to why it cannot be collected from the fee-payer.
HMRC will not seek to recover from other persons where:
• the failure to account for tax and NICs by the person who should initially have paid it is as a result of a genuine business failure on the part of that person, and
• the person who should have initially paid it has not knowingly benefitted as a result of winding up without paying the tax liability.
HMRC may recover from other persons in circumstances including, but not limited to:
• where a promoter of tax avoidance or any other party has entered into the labour supply chain, or other similar contrived situations where the intention is to
avoid the tax and NICs liabilities that would rest with the person who should have paid those liabilities;
• where a client or agency 1 in the chain requires workers to provide their services by contracting through a particular party that is likely to have been chosen due
to its non-compliance with the off-payroll working rules;
• where a fee-payer/deemed employer liquidates where the intention of liquidation was to avoid the income tax and NICs liability due from application of the off
payroll working rules;
• Where a client or agency 1 in the chain knew, should have known or had reasonable grounds to suspect that the labour being supplied to them was supplied
through a party or parties in the labour supply chain that did not comply, or had no intention of complying with the rules.
Example
ESM10031 - Employment Status Manual - HMRC internal manual - GOV.UK
An end client contracts with agency 1 for the provision of labour. Agency 1 subcontracts the provision of labour to agency 2. Agency 2 then contracts with a worker's intermediary for the provision of the worker's services to the end client. If all conditions within the legislation are met then agency 2 is the fee-payer (ESM10017 (ESM10017 - Employment Status Manual - HMRC internal manual - GOV.UK)) and is responsible for operating PAYE on payments and remitting tax and Class 1 NICs to HMRC.
If agency 2 fails in that obligation, and HMRC is unable to collect the income tax and NICs from agency 2, then HMRC may seek to recover from agency 1 first. This is the case even if there are more agencies in the contractual chain between agency 1 and the fee-payer. If HMRC cannot collect from agency 1, then HMRC may seek recovery from the end client.
HMRC would not seek to recover the income tax and NICs from agency 1 where they cannot be collected from agency 2 as a result of a genuine business failure.

[IRMe]

ESM10034

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: miscellaneous expenses
This is a draft and may be subject to change
Medical Insurance
EIMO1550 (EIM01550 - Employment Income Manual - HMRC internal manual - GOV.UK) sets out the tax treatment of medical expenses.
Chapter 10 Part 2 ITEPA 2003 does not change these rules.
Accountancy Fees
The cost of tax advice in relation to off-payroll working is not a deductible expense in the deemed payment calculation (see ESM 10028).

[ladymuck]

Thanks!

[Lance]

Thanks!

That’s passive aggressive.