Off-payroll rules and the hidden tax risk to contractors
The introduction of the off-payroll rules in 2017 for the public sector and 2021 for the private sector, shifted the responsibility for determining a contractor’s employment status from the freelancer to the engager. Furthermore, where the engager deems a contractor to be ‘inside’ IR35 then it becomes liable to deduct and pay over to HMRC the necessary PAYE tax and Class 1 NIC, unless there is a fee-payer involved in the contractual chain, e.g an agency or employment business.
Even where the engager errs in their status determinations, ie incorrectly assesses a contractor as being ‘outside’ IR35, the tax and NIC risk lies with their organisation or fee-payer. However, depending on the circumstances and the facts involved, it is possible for HMRC to collect PAYE from the contractor. Regulation 72 Income Tax (PAYE) Regulations 2003 permits HMRC to direct that individuals pay the PAYE that should have been deducted from their earnings in two situations:
- Where the employer ‘took reasonable care’ to comply with the PAYE regulations and the failure to deduct tax was due to an error made in good faith.
- Where HMRC is of the opinion that the employee has received payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from payments.
It is also possible for HMRC to collect employee’s NIC from the employee if the failure to collect was not due to any negligence by the employer or if the individual knows that the engager has ‘wilfully failed’ to collect the NIC (Regulation 86 Social Security (Contributions) Regulations 2001)).
In the vast majority of cases where HMRC re-categorise the employment status of a worker(s) that brings about arrears of PAYE and NIC, the Revenue will seek to collect the liability from the deemed employer or others in the contractual chain. Nevertheless, and as remote as it may appear, there remains a risk to the contractor by virtue of the above legislation and therefore gives rise to an insurable interest which can be protected by a contract of insurance.
For a contract of insurance to be valid, the insured person must have an insurable interest in the subject matter of the insurance policy, e.g the insured would suffer loss if the event that is insured against takes place.