Draft Employment Status Manual Updates

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esm10011, esm10013, esm10014, esm10018-21

Just this:

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: responsibilities of the public authority and medium/large sized organisation not in the public sector
Guidance withdrawn 3 February 2020

Will be republished in due course

esm10009, esm10012, esm10015-17, esm10022, esm10024, esm10029, esm10031, esm10034

Just this:

DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: Status Determination Statement (SDS)
HMRC is committed to publishing an updated employment status manual reflecting the April 2020 reform changes as soon as possible

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ESM10023 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: consequences of providing fraudulent information
This is a draft and may be subject to change

Section 61V Chapter 10 Part 2 ITEPA 2003

Regulation 22 Social Security Contribution (Intermediaries) Regulations 2000

The fraudulent information provisions apply where a relevant person (see below) provides another person with any document designed with the purpose of avoiding the legislation. This encompasses any document which has the intended effect of achieving a false position which shows:

The contract is not an engagement to which the legislation applies or
That none of the conditions at ESM10003 are met.
In these circumstances the worker is treated as the deemed employer for the purposes of making the deemed direct payment. In effect, the worker is treated as both the employee and the employer.

Relevant persons are:

The worker
A person connected with the worker
If the worker’s intermediary is a company, an office-holder of that company.
Examples:

A document wrongly indicating the worker doesn’t have a material interest in the intermediary
Evidence the worker provides to the client for them to consider within the status determination that is false.
Where the worker provides fraudulent information they will be liable for both employee and employer deductions and it is the worker which HMRC will pursue.

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ESM10025 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: international tax issues
This is a draft and may be subject to change

Section 61R Chapter 10 Part 2 ITEPA 2003

Where a UK resident worker falls within the off-payroll working rules and provides services to a client abroad then the legislation may not apply for NICs purposes_._ For tax purposes, a UK resident worker is usually liable to tax in the UK on all earnings, irrespective of where the services were provided.

The worker must be a person who is within the UK charge to tax and/or liable for Class 1 NICS

Where a worker should be subject to UK tax and NICs (based on existing domicile and residency rules), then UK domestic legislation applies to the engagement. This means the engagement could be subject to Chapter 10 (tax) / Part 2 (NICs) rules. A client does not need to consider whether Chapter 10 / Part 2 rules apply where there is no liability to tax and NICs in the UK.

Worker in the UK

A worker carrying on duties in the UK for an end client will normally fall within scope of the UK charge to tax and be within the off-payroll intermediaries’ legislation. There are some exceptions for non-UK residents visiting the UK briefly

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Class 1 NICs should be deducted unless the worker coming to the UK can present documentation proving that they pay social security contributions in another country for which special rules apply or domestic legislation deems NICs not to be due. For example, a non-UK resident worker provides their services in the UK, but holds a certificate of coverage for another country. In this situation the worker would be liable for NICs in the UK, but are exempt because of the certificate of coverage.

Worker outside the UK

For a UK-resident worker carrying on duties outside of the UK for an end client, the intermediaries’ legislation may not apply for NICs, however there are exceptions to this, depending on how long they will be abroad and where the client is based.

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A UK resident is liable to tax wherever in the world the earnings arise, so the tax position is not affected by the location in which the duties are performed.

Tax on foreign income: UK residence and tax - GOV.UK

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ESM10026 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: international examples
This is a draft and may be subject to change

This page provides examples where different parties in the contractual chain are based in different countries and what impact that has on the off-payroll working rules.

Scenario 1

The client is resident in a country outside the UK but all other parties are based in the UK. So the agency and worker’s intermediary are based in the UK. The services are also provided by the worker in the UK.

Answer 1

The rules can still apply if the client is based overseas. The makeup of the contractual chain and whether there is UK tax/NICs liability will determine how the rules apply. The rules can only apply if there is UK liability, the off-payroll working rules don’t change rules around residency. Here work is provided in the UK so the rules can apply. The client will need to make a status determination statement and pass it to the worker directly and to the agency. By passing the status determination statement down the contractual chain to the UK agency the client would have discharged its responsibilities under the legislation (subject to meeting the requirement to exercise reasonable care). As we have a UK agency in the chain, so long as that agency is a “qualifying person” the agency will be liable for deducting tax and NICs and paying these to HMRC.

Scenario 2

The client and the worker’s intermediary are resident in a country outside the UK. The agency is based in the UK.

Answer 2

Providing there is a UK liability, which will depend on where the worker is resident and where the work is done, the rules can apply. It does not matter where the worker’s intermediary is based so this does not affect the operation of the rules. As per scenario 1, as we have a UK based agency, they will be responsible for deducting tax and NICs and paying these to HMRC if there is a UK tax liability.

Scenario 3

A client resident in a country outside the UK operates an oil/gas platform a) within 12 nautical miles of the UK (so within UK waters) or b) outside UK waters.

Answer 3

If an engagement can give rise to a UK liability to tax and NICs then the off-payroll working rules can apply. This would be the case even if the client is based overseas. So scenarios a) and b) would need to be considered to see if a UK liability exists (regardless of the off-payroll working rules) and if it does then the rules can apply subject to any other legislation that may be relevant and take precedence over off-payroll working rules (for example legislative provisions for continental shelf workers or mariners).

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ESM10027 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: how to calculate the amount of the chain payment
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

A chain payment is defined, for tax purposes, as “A payment, money’s worth or any other benefit, that can reasonably be taken to be for the worker’s services to the client.”

For NICs purposes chain payment is defined as “A payment or money’s worth that can reasonably be taken to be for the worker’s services to the client.”

Benefits will be subject to Class 1A NICs in the same way as for normal employees.

The actual amount invoiced by the intermediary to the end client, or agency, may include fees for more than one worker. In these circumstances the fees must be apportioned between each worker on a reasonable basis.

EXAMPLE

Bravo Ltd provides the services of two workers, Samantha and Vaider, to an end client under a contract which is subject to by the off-payroll working legislation. Bravo Ltd invoices the end client for an amount of £3,000 per month. Samantha’s services account for 67% of the invoiced amount and Vaider’s the remaining 33%.

In arriving at the correct chain payment for both Samantha and Vaider, the deemed employer must apportion the invoiced amount between the workers in the respective amounts to arrive at the amount which can reasonably be taken to be for their services;

Samantha – 67% of £3,000 (£2,000)

Vaider – 33% of £3,000 (£1,000)

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ESM10028 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT Off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: how to calculate the deemed direct payment
This is a draft and may be subject to change

Section 61Q Chapter 10 Part 2 ITEPA 2003

Regulation 17 Social Security Contributions (Intermediaries) Regulations 2000

The legislation treats the deemed employer as making to the worker a payment which is to be treated as earnings from an employment, called a deemed direct payment. This deemed direct payment is treated as made at the same time as any chain payment. The payment is taxable in the same way as employment income, and PAYE and NICs should be operated on it.

The deemed direct payment is calculated as follows:

Step One

Identify the amount or value of the chain payment (see ESM10027) made by the person who is treated as making the deemed direct payment and deduct any amounts in respect of VAT.

Step Two

Deduct from the amount resulting from step one the direct cost to the intermediary of materials used, or to be used, in the performance of the services.

Step Three (optional by the person treated as making the deemed direct payment)

Deduct from the amount resulting from step two the amount as represents expenses met by the intermediary that, under ITEPA 2003, would have been deductible from the taxable earnings of the employment under section 10 ITEPA 2003 in accordance with section 327(3) to (5) if;

The worker had been employed by the client and
The expenses had been met by the worker out of those earnings.
Step Four

If the amount resulting from step three is nil or negative there is no deemed direct payment, otherwise the resulting amount represents the deemed direct payment.

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ESM10030 - Employment Status Manual - HMRC internal manual - GOV.UK

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). 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-NICable 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.

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), 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;

remuneration from David Ltd of 12 x £1,000 £12,000

dividends from David Ltd of 12 x £3,200 £38,400

£50,400

Annually David Ltd receives;

total fees from the client of 12 x £5,400 £64,800

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) 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.

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ESM10032 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: recovery from other persons – steps clients and agencies can take to secure labour supply chains
The intention behind the provision is to incentivise and drive up the use of compliant labour supply chains to ensure the rules are applied as intended. To help prevent the liability being recovered from agency 1 or the client, those parties may wish to take steps to ensure the parties that are contracted in their labour supply chains are compliant.

It is in the interest of the client and/or agency 1 to check carefully who they are dealing with. It is good commercial practice for businesses to carry out checks to establish the credibility and legitimacy of their supply chain.

A judgement on the integrity of the labour supply chain and the suppliers, customers and goods or services within it would be expected to be made. This could include checking carefully who they are dealing with in relation to the nature of the supply to establish the integrity and credibility of those within the labour supply chain, considering:

What is the agency/labour supplier’s history in the trade?
Is the agreed contract price for the supply of labour lower than market value without a clear explanation for why?
Have normal commercial practices been adopted in negotiating prices?
Have they been asked to make payments to third parties other than the party the client is contracting with or asked to make payments to an offshore bank account? If so, is there a valid reason for that?
Is a newly established agency with minimal trading history offering to supply labour cheaper than a long-established agency?
Is this the same agency/labour supplier as previous, but operating under a different name? If so, why?
Is the party insisting that they can further subcontract the labour supply? If so, why?
Suitable checks to secure the labour supply chain will vary depending on the circumstances and length of supply chains. Each organisation should consider what checks are suitable in their individual circumstances

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ESM10033 - Employment Status Manual - HMRC internal manual - GOV.UK

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: impact on pensions tax relief
This is a draft and may be subject to change

Deemed employers

The off-payroll working rules in Chapter 10 Part 2 ITEPA 2003 do not make the deemed employer responsible for offering or operating private or occupational pension contributions. The tax and NICs legislation will not trigger the obligation to provide a workplace pension. The deemed employer therefore will also not need to operate auto-enrolment for pensions.

The worker’s intermediary

Where the worker’s intermediary contributes to an occupational or personal pension, this may qualify for tax relief. This does not change as a result of Chapter 10 Part 2 ITEPA 2003.

Tax relief on employer pension contributions is given by allowing them to be deducted as a business expense, therefore reducing the employer’s taxable profit. The Pensions Tax Manual PTM043000 sets out further guidance on employer contributions and tax relief.

Tax relief is available to the worker on their contributions. Normally this will be afforded by the:

● employer (the worker’s intermediary) where they take workplace pension contributions out of the person’s pay before deducting tax, or

● pension provider claiming tax relief at 20% and adding it to the pension (relief at source).

Tax relief that is due but has not been relieved at source, can be claimed by the worker in their Self-Assessment tax return.

Insufficient taxable income available for the worker’s intermediary to give tax relief at source

Because the intermediary can offset the amount of tax that was deducted from its fee by the deemed employer against the tax liability on employment income it pays to the worker, situations can arise where the intermediary then is unable to give pension tax relief at source. In this situation, the unused tax relief should be claimed by the worker through their Self-Assessment Tax Return.

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esm10035

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: CT accounting
This is a draft and may be subject to change

HMRC will accept accounts that have been prepared under either a gross or net receipt basis since the tax result is the same. But preparers of the accounts will need to consider the most suitable approach to ensure the financial statements are prepared in accordance with UK GAAP. HMRC recommends recording the amounts gross for completeness.

Since the deemed payment amounts have already been subject to tax and NICs, no further tax is due on those amounts or this would be double taxation. This can be achieved in different ways depending on whether income from off-payroll working arrangements is recorded gross or net within the PSC’s accounts and whether the money is taken out of the PSC as salary or dividends.

Money recorded net

Recording the income as net means recording as income the amounts after tax and NICs. Under this approach no further deduction as an expense for tax and NICs would be permitted otherwise relief for these amounts has been claimed twice.

If the worker takes the net amount out of the business as salary this would be done as a non-taxable and non-NICable payment. Taking the amount as a salary would create another expense for the business that would reduce profits. If the whole net amount is taken then no further amounts would be included in any company profit and so no double taxation can occur.

Example

A worker offering their services through a PSC performs services for Major Retail Ltd, a large business. The engagement is subject to the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the 12 month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a salary each month without deducting anything further and submits this through payroll on a Full Payment Submission.

Within the company accounts the VAT exclusive amount of £600 would be recorded as turnover. Nothing would be debited for expenses of tax and NIC as the amount is net. £600 would be expensed to represent the salary taken and this is the same for each of the 12 months.



Turnover (12 x £600) = £7,200 (credit income)

Less Salary expense (12 x £600) = £7,200 (debit in the profit and loss)

Profit = £0



If the net amount is not taken as salary but instead taken as dividends relief is given during the calculation of taxable profits to ensure corporation tax is not taken from already taxed income. In the above example there would be £7,200 profit at the end of the year. During the taxable profit calculation a deduction of £7,200 would be made to ensure taxable profit is reduced to £0.

If the PSC receives income outside of off-payroll working engagements these would still be subject to taxes in the normal way. Only relief up to the amount of the deemed direct payment can be claimed.

Money recorded gross

Recording the income as gross means it is recorded as turnover inclusive of tax and NICs. So in the above example, instead of recording turnover of £600 each month, the PSC would record turnover of £1,000. Then the £400 would be debited as an expense in the profit and loss to record the payment of tax and NICs. Ultimately this then leaves the PSC in the same position it would be if the amounts were recorded net and so taking the money as salary or dividends would be treated the same way as above.

Example

Using the Major Retail Ltd example above with the PSC taking the net amount out the PSC as salary:



Turnover (12 x £1,000) = £12,000 (credit income)

Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)

Less Salary expense (12 x £600) = £7,200 (debit in profit and loss)

Profit = £0



Using the Major Retail Ltd example above with the worker taking the net amount as dividends:



Turnover (12 x £1,000) = £12,000 (credit income)

Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)

Profit = £7,200

When calculating the company’s taxable profit a deduction of £7,200 would be made to leave taxable profit of £0. Then £7,200 taken as tax free dividends.



If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10 applied, and tax and NICs are refunded, the necessary corrections to the accounts must be made to reflect the new position. Without the corrections relief will have been claimed without any corresponding expense incurred and so an underpayment of tax will occur.