Draft Employment Status Manual Updates

[WordIsBond]

My post count has now been duly inflated. I'll let others make your own judgment as to whether HMRC content is more substantive than the drivel I usually post.

[WordIsBond]

We've had some discussion of the situation with international clients. As always, this is HMRC guidance, which is not the same as legislation, but even so I found some things interesting:

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

(snip)
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.

And perhaps more relevant:

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 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.

(emphasis added)

This appears to indicate that HMRC agrees with those who have read the legislation as indicating that overseas clients are held to be liable to comply with the legislation and provide an SDS. If the contract is direct with an overseas client, rather than through a UK agency, the client is the fee-payer and would be considered by HMRC to be liable.

How they propose to enforce that on overseas clients is, of course, unexplained. But apparently they think they can....

[ladymuck]

WRT to ESM10035 (the last one shared) what I don't get is where the £400 gets recorded.

Issue an invoice of £1000 + £200 VAT
Sales of £1000 and VAT liability of £200 recorded

Client deducts £400 in taxes and pays £800, of which £200 is VAT

The bank receives £800 so where do you journal the £400 paid in taxes?

[WordIsBond]

Pay your accountant to tell you.
/NLUK

[jamesbrown]

We've had some discussion of the situation with international clients. As always, this is HMRC guidance, which is not the same as legislation, but even so I found some things interesting:


And perhaps more relevant:

(emphasis added)

This appears to indicate that HMRC agrees with those who have read the legislation as indicating that overseas clients are held to be liable to comply with the legislation and provide an SDS. If the contract is direct with an overseas client, rather than through a UK agency, the client is the fee-payer and would be considered by HMRC to be liable.

How they propose to enforce that on overseas clients is, of course, unexplained. But apparently they think they can....

Yeah, I found that interesting, although perhaps revealing that they didn't include an example for a fully overseas supply chain.

They also seemed to initially concede that the rules may not apply for NIC purposes and then to say that they might, which isn't necessarily contradictory, but examples would help.

As you say, it's guidance, and their guidance is often wrong, but I think it ballpark reflects 10(2)61R(7) on "deemed residence", which I've been banging on about.

Completely unenforceable of course.

It's also worth looking at the guidance on the responsibilities of the worker.

[WordIsBond]

Would be nice if they had an example with a foreign client with no UK agent, just to clarify it more fully.

[jamesbrown]

Would be nice if they had an example with a foreign client with no UK agent, just to clarify it more fully.

Agree, and it makes me wonder why they didn't.

[ladymuck]

Pay your accountant to tell you.
/NLUK

I did once ask them when this all kicked off in the public sector and they didn't know and I wasn't fussed enough to push it at the time.

Maybe they've figured it out by now.

[WordIsBond]

I did once ask them when this all kicked off in the public sector and they didn't know and I wasn't fussed enough to push it at the time.

Maybe they've figured it out by now.

Since there's still no legislation, they haven't.

[IRMe]

My turn for post count increment, with some of the missing docs. All retrieved from Google Cache of ESM10000 - Employment Status Manual - HMRC internal manual - GOV.UK (and subsequent pages e.g. 10013, 10018 etc) as of AM 04/02/2020.

ESM10013 [This is an important one for SDS]:

DRAFT off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2020): basic principles: what constitutes a valid Status Determination Statement (SDS)
This is a draft and may be subject to change
Section 61NA Chapter 10 Part 2 ITEPA 2003
Regulation 14A Social Security Contributions (Intermediaries) Regulations 2000
For the Status Determination Statement (SDS) to be valid the client must:
• state in the SDS whether or not the worker would be an employee or office holder, or is an office holder, for tax and NICs purposes if they were directly engaged by the client.
provide their reasons for coming to that conclusion.
• have taken reasonable care in coming to their conclusion (see ESM10014).
If the SDS does not satisfy the 3 criteria above, it will not be valid and the responsibility for the deduction of tax, NICs and apprenticeship levy, if due, and paying these to HMRC will rest with the client. Advertising a role as inside or outside the rules may add clarity to workers, but it is not, on its own, sufficient to be a valid SDS.

The SDS must contain the conclusion the client has reached as to whether the condition at s61M(1)(d) ITEPA 2003 and regulation 13(1)(d) SSCIR 2000 is met. This condition requires the client to determine whether or not the worker would be an employee or office holder if engaged directly. To make this decision the client must consider the status as if there were no other parties in the chain apart from the worker and themselves. The decision should be based on normal status principles (see ESM0500 (ESM0500 - Employment Status Manual - HMRC internal manual - GOV.UK)).

The SDS must also contain the reasons why the client has come to their conclusion, based on the principles that govern whether a worker is an employee or office holder (set out in ESM0500 (ESM0500 - Employment Status Manual - HMRC internal manual - GOV.UK) and ESM2500 (Page not found - 404 - GOV.UK manuals/employment-status-manual/esm2500)). This will include the relevant considerations made, so as to provide sufficient clarity around the conclusion. These reasons will give the worker and deemed employer the information they need to understand why the conclusion has been reached, and enable them to make representations should they disagree through the client-led disagreement process (see ESM10015).

If the client has provided a conclusion with reasons, but has not taken reasonable care in doing so, this will not be a valid SDS, and responsibility for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC will rest with the client.
Status determinations made prior to 6 April 2020 can be a valid SDS for engagements carrying on after 6 April 2020 providing they meet the legislative requirements. The SDS must include the reason for reaching the conclusion and have been passed to the worker and any third party the client contracts with.
HMRC's Check Employment Status for Tax (CEST) tool can be used to aid those making employment status decisions. If the answers provided to CEST are accurate and in line with HMRC guidance, regardless of which version was used, HMRC will stand by the outcome, provided this outcome is followed. The output will contain all the questions and supplied answers that led to that outcome. HMRC considers that an accurate CEST output can be used to constitute a valid SDS providing it meets the conditions above. An enhanced version of CEST was released on 25 November 2019. HMRC considers accurate outputs from the enhanced version of CEST meet the legislative requirements to be a valid SDS. Other tools and advisers may be used and the conditions for the SDS to be valid would apply equally to those.