ESM10031 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: recovery from other persons – how it will be applied

HMRC recovery powers

HMRC has a range of recovery powers. Determining whether to use a power such as these recovery provisions, is dependent on the facts. HMRC will consider all circumstances when exercising its judgment and discretion in determining if it is appropriate to use these powers. Specialist teams will deal with the use of these powers and clear and robust governance procedures will be established when deciding whether or not to recover from the specified parties in the labour supply chain.

The provisions within the Finance Act 2020 to make individuals jointly and severally liable in cases of insolvency will only be used in cases of insolvency or threatened insolvency, where there has been tax avoidance, evasion or repeated insolvencies leaving unpaid amounts due to HMRC. There are likely to be limited circumstances where both those provisions and the recovery from other persons provisions could apply.

Recovery from other persons provisions

Where HMRC cannot recover (for example, because the company has dissolved) or has attempted to recover a deemed employer PAYE debt and is satisfied that there is no realistic prospect of recovering the tax, NICs and apprenticeship levy liabilities due from the deemed employer ( see ESM10017) within a reasonable period of time, HMRC may decide to recover the debt from a relevant person.

Relevant persons are:

  • the first agency in the chain (the agency the client contracts with and the second highest person in the contractual chain – referred to as ‘agency 1’), and
  • the client (the highest person in the contractual chain).

The provisions do not allow for the recovery from directors or officers of these relevant persons.

‘Deemed employer PAYE debt’ is the amount the deemed employer is liable to pay under PAYE regulations because the off-payroll working rules apply.

HMRC would look to recover the liability from relevant persons in this order:

  • agency 1, if agency 1:
    • exists,
    • is a qualifying person, and
    • is not the deemed employer (see ESM10017).
  • the client, if:
    • agency 1 is the deemed employer,
    • agency 1 is not a qualifying person, or
    • there is no realistic prospect of recovery from agency 1.
Conditions for recovery of deemed employer PAYE debt

HMRC cannot seek to recover a deemed employer PAYE debt from relevant persons where:

  • the tax and NICs in question arose from a tax year commencing before 6 April 2021,
  • the deemed employer originally responsible for the PAYE debt is the client. This is because the client is already liable, so there is no one else above the client in the contractual chain to recover the debt from, or
  • a recovery notice has not been issued to the relevant person the debt is to be collected from during the relevant period.
Relevant period

The relevant period begins either:

  • 30 days from the day on which the regulation 80 notice was issued to determine the tax due. Tax determined under regulation 80 is a formal means of recovering unpaid PAYE tax by HMRC. A period is only relevant where all or part of the tax due remains outstanding or no appeal has been made.
  • when an officer of Revenue and Customs becomes aware that there is sufficient information to issue a regulation 80 notice but cannot do so because the deemed employer has dissolved, liquidated or has some other incapacity (such as a partnership which no longer exists). Normal time limits regarding the issue of a regulation 80 notice apply i.e. if HMRC would be out of time to issue a regulation 80 notice, this provision cannot apply.
EXAMPLE

During a review of customer documents, records and other information, an officer of Revenue and Customs forms the opinion that there is sufficient information to show an underpayment of tax under the off-payroll working rules. Ordinarily a regulation 80 notice would be issued to the deemed employer. The deemed employer has since been dissolved and so the officer cannot serve the regulation 80 notice on them as it is impractical. The time the officer became aware there was sufficient information to issue a regulation 80 notice is the time the relevant period begins.

The relevant period ends:

  • 12 months after the relevant period begins.
Recovery notice

HMRC cannot recover debt from a relevant person unless a recovery notice is issued to that person within the relevant period. The person from which the debt will be recovered will know they are responsible for the debt on receipt of a recovery notice.

The notice will contain details of the debt as follows:

  • the name and address of the deemed employer to whom the PAYE debt relates,
  • the amount of the PAYE debt,
  • the tax period to which to PAYE debt relates. If more than one period, then also the apportionment to each period,
  • when the relevant period began and what circumstance started the relevant period (see above),
  • the relevant person’s name and address. This is the person the debt is being recovered from, and
  • whether than person is the client or agency 1 per the legislation.

The notice will also contain a statement from an officer of Revenue and Customs that the officer is of the view that there is no realistic prospect of recovering the PAYE debt within a reasonable period of time from:

  • the person initially responsible for the debt (the deemed employer), and
  • agency 1 in cases where agency 1 exists and a recovery notice is given to the client.

A separate recovery notice must be issued to the client within the relevant period if HMRC has attempted, and has been unable, to recover the PAYE debt from agency 1.

Appeals

A person in receipt of a recovery notice will have certain rights of appeal. An appeal against a recovery notice must be made within 30 days, beginning with the day the recovery notice is given, specifying the grounds of appeal.

The grounds of appeal are:

  • all or part of the amounts listed in the recovery notice does not relate to a relevant PAYE debt of the deemed employer,
  • there is a realistic prospect within a reasonable period of time of recovering the debt from the deemed employer,
  • in the client’s view there is realistic prospect of recovering the PAYE debt from agency 1,
  • that the person is not a relevant person i.e. that the person is not the client or agency 1,
  • that the recovery notice was not given by an officer of Revenue and Customs to the client or agency 1 within the relevant period, or
  • that the recovery notice does not contain all the required details per the legislation.

However, a person cannot appeal the amounts listed in a recovery notice if it has already been decided in an appeal that the debt is a relevant debt payable by the deemed employer. For example, if the deemed employer appealed the debt and this appeal is final, the client or agency 1 cannot appeal again in relation to whether there is an underlying debt.

HMRC application of recovery provisions

HMRC will not seek to recover from agency 1 or the client where the failure to account for tax and NICs by the person who should initially have paid it (the deemed employer) is as a result of a genuine business failure on the part of that person.

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 the deemed employer liquidates where the intention of liquidation was to avoid payment of 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.
GENERAL EXAMPLE

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 deemed employer (ESM10017) 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 within a reasonable period of time, 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 deemed employer. 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.

GENUINE BUSINESS FAILURE EXAMPLE ONE

Using the context set out in the general example above.

Agency 2 deducted tax and NICs from payments to the worker’s intermediary. Agency 2’s main source of income was from a large contract with another party. The other party terminated that contract through their own choice and so agency 2 lost its main source of income. As a result of this loss agency 2 couldn’t pay its debts, including debts to HMRC, and was subsequently liquidated.

This is a genuine business failure. Agency 2 did not benefit in any way from its own liquidation or the events surrounding it, nor did agency 2 intend not to pay its debt to HMRC, the loss of the contract was something outside of agency 2’s control. In this case HMRC would not seek to recover the debt from agency 1 or the client.

GENUINE BUSINESS FAILURE EXAMPLE TWO

Using the context set out in the general example above.

Agency 2 contracted with agency 1 at a deliberately low rate in the knowledge that they were not going to pay any tax or NICs it deducted to HMRC. Agency 2 did this to ensure that contract with Agency 1 was secured and agency 1 knew they were paying well below the market rate. Agency 2 kept all income from the contract and intentionally avoided the debt to HMRC by liquidating before paying the amounts due.

This is not genuine businesses failure. Agency 2 intentionally liquidated to avoid debt and benefitted from withholding of payments due to HMRC. As Agency 2 has liquidated the business no longer exists and so there is no realistic prospect of recovery by HMRC within a reasonable period of time. HMRC will first seek to recover the debt from agency 1. If it cannot be recovered from agency 1, HMRC can seek to recover the debt from the client.