Rules effective from April 2017 and April 2021 shifted the responsibility for deciding if IR35 applies to a contract from the worker to the client, but not in all cases. Many workers must still make the decision. What might be the consequences of getting it wrong?
Old IR35 rules
In 2019 First-tier Tribunal (FTT) ruled on a case involving a company set up by the BBC presenter Christa Ackroyd (A). However, the dispute has mistakenly been associated with the rules which took effect in April 2017 for off-payroll workers who provide their services (through companies) to public bodies. In fact, the case relates to periods prior to these rules and so isn’t a test of their effectiveness. Nevertheless, the FTT’s decision raises an important question about where the liability for IR35 tax lies.
The FTT ruled that had A contracted for work directly with the BBC, rather than through her company Christa Ackroyd Media Ltd (CAM), she would have been an employee. Consequently, IR35 applied to the contract and CAM ought to have accounted for PAYE tax and NI on the money it received from the BBC. The amount owed to HMRC is more than £400,000. The trouble is, CAM doesn’t appear to have the money to pay it.
Whose tax bill is it?
The failure to pay the PAYE tax and NI is CAM’s, and HMRC must look to it first for payment. If a company can’t pay, the creditors can only enforce payment from the directors through the courts by showing that the unpaid debts resulted from the directors acting improperly. However, HMRC can use tax regulations to shift the liability for PAYE tax to the director/employee from whom the tax should have been deducted. There are different regulations for NI, but they have a similar effect.
Not a foregone conclusion
HMRC has a choice of two regulations, depending on the circumstances, which allow it to assess the director or employee for the unpaid tax. It might seem that HMRC has this case sewn up, because if CAM can’t pay then A will have to. However, it’s not that simple.
HMRC can use reg 80 Income Tax (Pay As You Earn) Regulations 2003 to demand a PAYE shortfall from the employer. If it can’t or won’t pay within 30 days, HMRC can move to reg 81 and demand payment from the employee. It can only do this if the employee was aware that the employer deliberately failed to apply PAYE when it knew it should.
Tip. Keep records that show your company has considered whether PAYE should apply. That will protect your company and you from HMRC collecting the tax using regs 80/81 .
Trap. If circumstances mean HMRC can’t use regs 80/81 , it can resort to reg 72 , which also shifts the PAYE bill from the employer to the director/employee. HMRC has to show that the employer’s failure to operate PAYE was made in good faith.
There’s no happy ending for A. It seems likely she didn’t properly consider the risk that IR35 posed, if at all. If she had, she might have realised PAYE tax and NI was payable and saved the expense of going to court and avoided the interest and penalty charges HMRC will no doubt charge. The moral is to take expert advice before and not after the event.
By: FL Memo