ESM10017 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: off-payroll working and the contractual chain

Section 61N Chapter 10, Part 2 ITEPA 2003
Regulation 14 Social Security Contributions (Intermediaries) Regulations 2000

Where the conditions in ESM10001; ESM10001A; ESM10003; ESM10011; ESM10012 and ESM10013 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 – the lowest person in the chain for the purposes of the off-payroll working rules is not the worker, it is the worker’s intermediary.

The fee-payer is the person in the chain immediately above the worker’s intermediary 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 to ESM10013 and ESM10015, if there is no person in the chain below the client and above the worker’s intermediary who is a qualifying person, then the client is the deemed employer and responsible for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due. Otherwise the deemed employer is the person who:

  • is above the worker’s intermediary,
  • is a qualifying person, and
  • is lower in the chain than any other person in that chain who is above the worker’s intermediary 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 been given by the client to the worker,
  • 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
  • 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 working legislation by End Zone Ltd. End-Zone Ltd should give a 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. Emile 2 Ltd contracts with Workers 4 U Ltd, which in turn 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 it was 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 working legislation. Magpie Ltd should give a Status Determination Statement to Alison and Redmen Ltd.

In this contractual chain the lowest party above the workers intermediary is International Workers Ltd who contract with Alison Ltd. International Workers Ltd is the fee-payer but is not a qualifying person as it is not UK resident nor has a UK place of business, and so is not responsible for operating PAYE. The lowest qualifying person in the chain is Redmen Ltd, and so it is the deemed employer and are responsible for operating PAYE as if it was 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 is responsible for operating PAYE. This is because it is the lowest qualifying person in the contractual chain and is a qualifying person. However, UK Ltd would only become a qualifying person when International Workers Ltd passes down the SDS to it.