Pre Finance Act 2014
The ‘host employer’ rules (as they were known) were designed to apply when:
- An employee works for a person (relevant person) other than their employer.
- Any payment of (or on account of) Pay As You Earn (PAYE) income of the employee is made by the employer (or the employer’s intermediary) or the relevant person.
- The PAYE regulations do not apply to the person making the payment (or to the employer if the person making the payment is the employer’s intermediary), and;
- Income tax is not deducted, or not accounted for, in accordance with the PAYE regulations.
If these host employer rules applied, the relevant person was deemed to have made the payment of the PAYE income for the purposes of the PAYE regulations, meaning that the person for whom the employee was working became responsible for operating PAYE.
The problem with these host employer rules was that, if the relevant person was resident abroad (and had no UK presence), the PAYE regulations would not apply to them.
However, for the relevant person to be aware that, as a result of this position and pursuant to the host employer rules, they became responsible for operating PAYE on the income, they would need to know that PAYE was not being dealt with by the offshore employer.
Post Finance Act 2014
Following consultations, these rules were amended by the Finance Act 2014. If:
- The employee worked for the relevant person under or in consequences of arrangements made between the relevant person and a third person.
- The third person did not make the payment of (or on account of) PAYE income of the employee, and;
- The PAYE regulations would apply to the third person if the third person were to make such a payment.
- The third person is deemed to have made a payment of PAYE income for the purposes of the PAYE regulations.
As a result of this change, if a UK agency provides the worker to the client, it is the UK agency that must operate PAYE.
The changes mean that the PAYE risk in the supply chain is now a potential issue for any UK agency that provides workers to clients.
There is no longer any comfort in the fact that any action by HMRC would be against the offshore employer—it is now for the onshore agency to ensure that the PAYE regulations are complied with.
Equally, if there is no onshore agency, the risk could pass to the onshore client. These changes therefore mean that there will be one UK entity that HMRC can pursue in the event that PAYE is not operated correctly.