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HMRC internal manual

Employment Status Manual

Basic principles: off-payroll working: off-payroll working and the contractual chain

Section 61N Chapter 10 ITEPA 2003

Regulation 14 The Social Security (Miscellaneous Amendments No.2) Regulations 2017

Where one of the qualifying conditions at ESM8035, ESM8045 or ESM8050 is 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.

 

The fee-payer is the person in the chain immediately above the lowest.

The fee-payer 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 the following sections if the fee-payer is not the client and is not a qualifying person.

However, subject to the legislative conditions explained at ESM9040 and ESM9050, if there is no person in the chain below the highest and above the lowest who is a qualifying person then for a reference to the fee-payer above, substitute a reference to the client. Otherwise for any reference to the fee-payer, substitute a reference to the person in the chain who;

  • Is above the lowest,
  • Is a qualifying person, and
  • Is lower in the chain than any other person in that chain who is  above the lowest and is a qualifying person

See examples below for how this works in two separate contractual chains

 

The qualifying persons test

A qualifying person is a person who;

  • Is resident in the UK, or has a place of business in the UK,
  • 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, and
  • 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 51(5) ITEPA 2003.

 

EXAMPLE

  1. A public authority contracts with a recruitment agency to provide the services of a worker (Jane). The recruitment agency has a place of business in the UK. The role which Jane will fill is judged to be caught by the off-payroll reform, as if she were engaged directly she would be regarded for income tax purposes as an employee of the public authority. Jane operates through her own PSC (Jane Ltd). The recruitment agency pays Jane Ltd on a monthly basis upon production of an invoice. 

In this example the recruitment agency is the fee-payer.

 

  1. A public authority contracts with a recruitment agency to provide the services of a worker (Emile). The recruitment agency holds a place of business in the UK. The role which Emile will fill is judged to be caught by the off-payroll reform. Emile operates through his own PSC (Emile Ltd). He also controls another PSC (Emile 2 Ltd) which contracts with the recruitment agency. Emile 2 Ltd agrees to provide the services of Emile, through Emile Ltd. The recruitment agency pays Emile 2 Ltd on a monthly basis upon production of an invoice.  Emile 2 Ltd then pays Emile Ltd on a similar basis.

Whilst Emile 2 Ltd is the person in the chain immediately above the lowest, as it is not a qualifying person, the recruitment agency is the fee-payer.