ESM10015A - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: client-led status disagreement process: guidance for workers

Section 61T Chapter 10, Part 2 ITEPA 2003

Regulation 20 Social Security Contributions (Intermediaries) Regulations 2000

This guidance is written to support workers who disagree with the status decision made by their client, but applies equally to deemed employers, who are also able to raise disagreements. An agency who is not the deemed employer (see ESM10017) within a contractual chain does not have the right to use the client-led disagreement process.

The legislation requires clients to deal with disputes relating to Status Determination Statements (SDS) by workers and deemed employerswithin 45 calendar days.

The legislation only sets out the minimum requirements for considering status disagreements, therefore different clients may have developed a process suitable for their specific business.

Disagreements can be made verbally or in writing. Clients may make their workers aware of the process for raising a disagreement when they start working for them or when they pass on their SDS to the worker. Clients are not obliged to confirm the receipt of a disagreement, but in practice many will do so.

If a worker disagrees with a decision in an SDS, they should make representations to their client using their disagreement process. They should include the reasons for the disagreement, in relation to the employment status indicators, so the client has sufficient information to consider them. If a worker has supporting evidence, it should be shared with the client when the disagreement is raised, or at the earliest opportunity after raising the disagreement. If a client receives a disagreement without specific reasons, for example a disagreement that simply states, “my status is wrong”, the client is not obliged to consider it and will be able to stand by their SDS.

In many cases, workers may use HMRC’s Check Employment Status for Tax (CEST) tool and include the output with their disagreement. Workers should also be aware that clients may ask them to provide further evidence to help them consider the disagreement. Where a client has asked for further information or documents and these are not received, the client should consider the representations based on the information which has been supplied to them.

 As a minimum the legislation requires the client to:

  • consider the worker’s and/or the deemed employer’s representations,
  • respond to the worker and/or the deemed employer’s representations within 45 calendar days, beginning with the day the representations are received, not from when the SDS was issued
    • inform:
    • the worker and/or deemed employer that it has considered their representations and decided that the SDS issued was correct and provide reasons, or
    • the worker and/or deemed employer it has considered representations and decided the SDS is incorrect and is withdrawn, providing a new SDS and stating the date from which it applies (*see below)
    • take reasonable care in making any new SDS and ensuring it contains the reasons for reaching that conclusion.

* If the client does issue a new SDS because it has changed its’ conclusion, it is required to stipulate the point in time the new SDS applies from.

Where the original SDS conclusion states that the rules apply, the deemed employer remains responsible for the deduction of tax and National Insurance contributions (NICs) and payment of apprenticeship levy throughout the status disagreement process.

If the original SDS conclusion states that the rules do not apply, this can be followed unless, and until, the client decides the worker falls within the rules.

If the client did not initially issue an SDS, but the worker feels their deemed employment status has been incorrectly assessed, the worker can still make representations. However, the normal 45-day time limit will not apply.

There is no cap on how many times a worker or deemed employer can raise a dispute, and representations can be made at any time. However, the client is only required to respond to representations made before the final chain payment is made in relation to that engagement. The client is not obliged to respond to representations made outside of this timeframe as there are no further chain payments on which PAYE could be operated.

Where a repeat disagreement is received that includes no new reasons, information or supporting evidence, clients can stand by their original disagreement decision.

Example

Brenda is engaged by Readstone Council, through her personal service company, to provide her services as an IT contractor. On her first working day Brenda is given an SDS that states she is a deemed employee for the engagement. Brenda disagrees with the assessment and raises this with her hiring manager, who directs her to fill in a form on the council’s intranet site which will trigger the disagreement process. The disagreement is treated as received on the date Brenda submitted the form as this is the first date specific representations disputing the SDS were given to the client.

Brenda states on the form that she believes her employment status for this engagement is self-employed, and provides evidence, along with a CEST output, indicating that she is exposed to financial risk. Brenda’s view is that this risk is caused by an expensive laptop and mobile phone that she uses for business. She attaches copies of the receipts and a copy of her own CEST output showing a self-employed for tax result.

While the client considers the disagreement, Brenda continues to be treated as a deemed employee in line with the original SDS. Readstone Council considers Brenda’s disagreement and provides a written response to her.

The response confirms the original determination, and explains the client’s view that Brenda does not have a financial risk from this engagement, after considering HMRC’s guidance in this area. The response goes on to state that for security reasons, they will only allow their own secure laptops to be used. A secure laptop was provided to Brenda on her first day, and there is no requirement for Brenda to use her own for this engagement. They also state that there is no requirement for her to use a mobile phone to fulfil the contract, and note that the mobile phone was purchased 12 months before the engagement started. In addition, they provide links to HMRC’s guidance on financial risk for employment status.

The Council e-mails a response to Brenda within 20 calendar days of receiving her representations, and the disagreement is closed. There is no need to inform the deemed employer of their decision as Brenda is already being taxed as a deemed employee.  

Notifying HMRC of a continued dispute with your deemed employment status

The client-led status disagreement process should always be used first where a worker or deemed employer disagrees with a client’s decision as to whether Chapter 10, Part 2 ITEPA 2003 applies.

Where, after completing the client’s status disagreement process, a worker still disagrees with the client’s determination and they consider they have been taxed incorrectly as a result, they can:

  • Submit a Self-Assessment tax return to reflect this and
  • Make claims to HMRC for secondary Class 1 NICs

This can only be done after the end of the tax year, once any tax and NICs have been paid over to HMRC. If workers contact HMRC asking to consider a dispute during the tax year, the request will be rejected, and the worker will be directed back to their client’s disagreement process.

Income Tax and Employee’s National Insurance contributions must be dealt with separately because only Income Tax is handled through the Self-Assessment system.

Income Tax

Workers should raise their disagreement via their Self-Assessment tax return, either when they submit their return, or by amending it if they are in time to do so. Individuals can submit their Self-Assessment tax return from the date the tax year ends, see Self-assessment-tax-returns/deadlines and Self-assessment-tax-returns/corrections..

Amounts from deemed employers relating to off-payroll working engagements which have already been taxed should automatically appear on the employment pages of worker’s Self-Assessment return. Workers should follow these steps while completing their return:

  • If there are multiple employments showing in the return, identify the employment income which is in dispute
  • Make sure that the ‘off-payroll worker subject to the rules’ indicator is ticked for this employment page
  • Restate the disputed employment income as zero
  • Leave the tax paid from the disputed employment income as it is
  • Complete the rest of the Self-Assessment tax return as normal, remembering to include any additional dividends that reflect the intended employment status recategorisatio
  • Record “OPW dispute” in the Self-Assessment white space at Box 19 of the return, to help ensure that the refund request goes to the correct team and can be dealt with promptly. This space can also be used to include further details of the dispute

Completing the Self-Assessment tax return will generate a refund request.

Additional supporting information can be attached to the return at the point of filing, see SAM126040. To support their refund request, workers should supply the following information, using the white space and attachments:

  • A copy of the client’s SDS which is in dispute
  • Copies of disagreement(s) raised with the client and any responses received
  • A copy of the worker’s view of their employment status, showing their understanding of the engagement. Workers can use CEST, HMRC’s free online tool to produce their own opinion
  • Confirmation of which employment status indicators are in dispute (where client and worker agree we will not seek to investigate these matters and will accept these as agreed facts)
  • Any supporting evidence in support of the refund request

On receipt of the original return including a request for a refund, or an amended return, HMRC may open an enquiry. In some cases, the Self-Assessment system will automatically issue a refund at the point of submission. However, HMRC may still enquire into the return after making such a repayment.

If we do open an enquiry, HMRC will write to the worker to inform them of this, and may request further information to assist them in progressing their enquiry. During the enquiry, HMRC may also need to contact the worker’s client to establish facts.

National Insurance contributions refunds

Any secondary Class 1 National Insurance contributions deducted from the relevant OPW income, must be reclaimed separately from the corresponding income tax.

Note that where a worker provides inaccurate figures in their tax refund request to reflect overpaid National Insurance, for example by adding an additional expense, these claims will be rejected by HMRC.

To reclaim overpaid National insurance, workers should write to HM Revenue and Customs (HMRC) after the end of the tax year they are claiming for.

The claim should include the following information:

  • the worker’s National Insurance number
  • the reason for the claim: an explanation that this is an off-payroll working dispute and HMRC are considering the related claim for income tax repayment
  • the tax year the repayment claim relates to
  • the amounts of National Insurance paid in the tax year that the claim is for – include a P60 or copies of all relevant payslips
  • the bank account name, sort code and account number for any refund to be paid into

The written claim should be sent to:

HM Revenue and Customs
National Insurance Contributions and Employer Office
BX9 1AN

Completing our check – refund request accepted

If HMRC concludes that the employment status for the engagement was incorrectly treated as a deemed employment, a closure notice will be issued which confirms this, and HMRC will make any other amendments required to the return to complete the enquiry. This will allow any outstanding tax refunds to be issued, and notification will be sent to the National Insurance Team that any outstanding NICs refunds can also be repaid.

Please note that where a refund of income tax and NICs is made, the worker’s intermediary will need to ensure that its accounts reflect this change. For example, if the worker has provided their services to the client through their own personal service company, this income will now be subject to corporation tax. If a corporation tax return has already been submitted, CT return(s) will need to be amended to reflect this change.

Completing our check – refund request rejected

If HMRC concludes that the employment status for the engagement was correctly treated as a deemed employment, a closure notice will be issued which confirms this, and HMRC will make any other amendments required to the return to complete the enquiry. Any amounts that were repaid automatically by the Self-Assessment system on receipt of the request will become repayable by the worker.

Notification will be sent to the National Insurance Team that any outstanding NICs claim should also be rejected, and any amounts of NICs that were automatically repaid will become repayable by the worker.

Further steps where a refund request is rejected

When the enquiry is completed and a closure notice is issued, it will state HMRC's decision on the worker’s employment status, and will set out how the worker can make an appeal and the time limit for doing so.

The caseworker who made the decision will look at the case again and if they do not change their decision, they will offer a review.

Workers who continue to dispute their employment status can appeal this decision through the first tier tribunal.

There’s further guidance on how to disagree with a tax decision at https://www.gov.uk/tax-appeals.

Example

Brenda maintains that her engagement with Readstone Council was not a deemed employment. She has no further representations to make to the council, so she escalates her dispute to HMRC. Her payslips show that she was paid £48,000 and was subject to £7,084 of income tax and £4,251 of employee’s NICs.

After the end of the tax year, Brenda completes the employment pages of her Self-Assessment tax return, including her income of £0 and tax deducted of £7,084 for her employment page for her Readstone Council employment. She marks the white space in Box 19 of her return with the words “OPW dispute” and provides an explanation of why she considers that she should have been treated as self-employed because of financial risk. She attaches further documents and copies of her receipts when she submits her return. She also writes to the National Insurance contributions office to make a corresponding claim for overpaid NICs of £4,251.

The Self-Assessment system automatically inhibits the repayment and Brenda’s case is selected for enquiry. HMRC gives notice of intention to enquire into the return under section 9A. During the enquiry HMRC  gathers the facts from both Brenda and Readstone Council. HMRC considers the facts that both parties have supplied, against the published guidance in the Employment Status Manual.

If, on consideration of the facts and evidence, HMRC concludes that Brenda was incorrectly treated asa deemed employee for the engagement, a closure notice will be issued which confirms this, and make any other amendments required to the return to complete the enquiry. Brenda’s income tax and NIC repayments will be released.

Alternatively, if HMRC concludes that Brenda was correctly treated as a deemed employee for the engagement, a closure notice will be issued. HMRC will amend the return to reflect the original position of income tax paid on a deemed employment, and make any other amendments required to the return to complete the enquiry.

Brenda had not received an automatic repayment, but if she had, any amounts that were repaid automatically by the Self-Assessment system on receipt of the request would become repayable by her. The NICs office will be notified that National Insurance contributions are not refundable on this case.

On receipt of her decision letter, Brenda must decide whether to accept that decision or appeal her decision.