House of Lords enquiry into implementation of Off-Payroll Working in the private sector
This enquiry has recently heard expert evidence regarding the implementation of the Off-Payroll Working changes. What are the key messages?
This enquiry has recently heard expert evidence regarding the implementation..
Since 6 April 2021, large and medium size businesses in the private sector have been required to determine the employment tax status of workers engaged through intermediaries (typically Personal Service Companies (PSCs)). Those determined to be ‘employed’ for tax purposes must be paid subject to PAYE, NIC and, typically, the Apprenticeship Levy. From 6 April 2023, the stand-alone Health & Social Care Levy will also be due. The House of Lords Finance Bill Sub-Committee is examining the implementation of Off-Payroll Working (OPW) and how the rules are operating in practice. The enquiry heard oral evidence from expert witnesses in early December. This article reviews three themes emerging from that evidence, and what practical issues businesses need to consider as HMRC’s ‘light touch’ approach to OPW compliance draws to a close in April 2022.
How robust are your status determinations?
The Committee heard evidence about HMRC’s Check Employment Status for Tax (CEST) tool.
HMRC will accept CEST’s status determinations provided: (i) the questions are interpreted in line with HMRC guidance; (ii) answers are based on accurate and complete information; and (iii) the position is revisited if anything changes. But these three provisos are critically important as there will be no ‘safe harbour’ from HMRC challenge if one or more don’t apply.
Furthermore, for cases close to the mark CEST may generate an ‘unable to determine’ result, so requiring further efforts to decide whether the worker is within or outside OPW. According to HMRC data published in September 2021 this happens some 21 percent of the time. Businesses will then need to revisit the fact pattern, seek advice, call the HMRC OPW helpline or possibly a combination of all three.
The overall message is that businesses need a robust methodology for determining whether OPW applies which should support their having taken reasonable care in so doing - there should also be a clear audit trail to this end. In addition, those doing the assessments should be appropriately trained, there should be a proper review process and any appeals should be dealt with fairly.
Is your labour supply chain tax compliant?
The Committee noted that the OPW changes have meant that a number of businesses have decided not to engage with PSCs, but instead to require that workers are employed by umbrella companies (i.e. companies that employ workers on behalf of an agency, which then provides those workers to its clients).
Most umbrella companies comply with their tax (and other) obligations, but unfortunately there are a number (typically based offshore) who do not. This clearly poses significant risks for businesses and workers when HMRC become aware that PAYE/NIC due on workers’ pay has not been accounted for and come knocking on the door.
This is a particular area of government focus at the moment, with a Treasury call for evidence to better understand how umbrella companies impact tax compliance and employment rights. HMRC have also issued guidance for engagers on due diligence to counteract umbrella company fraud, and guidance for workers on the potential tax risks of working through umbrellas.
The key message here for businesses is the importance of applying due diligence to their supply chains to gain assurance that tax (and other) obligations are being complied with. This would typically be underpinned by contractual commitments from labour suppliers that they have done their own due diligence and are also satisfied as to the integrity of the supply chain.
What do we mean by ‘employment’ for tax purposes?
The Committee heard that, because of the challenges in determining whether someone is employed or self-employed for tax purposes (particularly for those working in the gig economy), the Government should consider codifying what we mean by ‘employment’ in this context. Codification was the approach taken a few years back with another seemingly intractable issue (i.e. the meaning of ‘tax residence’ for UK tax purposes).
In fact in its response to the July 2017 independent report, Good work: the Taylor review of modern working practices, the then Government indicated that it would consult “to explore the best way to improve clarity for those on the boundary between employment and self-employment, including options for legislative reform”. We would encourage the Government to take forward this consultation in the hope that determining employment tax status for workers, businesses and indeed HMRC can be streamlined and simplified.
The House of Lords enquiry can be followed here.
One of the authors of this article, Colin Ben-Nathan, gave evidence at the 6 December session of the enquiry, sitting in his capacity as Chair of the Employment Taxes Committee of the Chartered Institute of Taxation.