Private sector off-payroll working reform: Government responds to House of Lords’ report

The Government has responded to the House of Lords’ recommendations on private sector off-payroll working reform. What should organisations consider?

The Government has responded to the House of Lords’ recommendations on private sector

The House of Lords published the report and recommendations of its Finance Bill Sub-Committee’s enquiry into the private sector Off-Payroll Working (OPW) reforms on 9 February 2022. The Government has now published its response. In this article, we summarise that response in relation to the key areas we highlighted in our previous coverage. We also suggest steps that organisations might consider as HMRC’s ‘light touch’ enforcement approach draws to a close on 5 April 2022.

More detail on the evidence received by the enquiry, and its conclusions, are set out in our previous coverage of the House of Lords enquiry and its report and recommendations.

HMRC’s Check Employment Status for Tax (CEST) tool

The Sub-Committee’s report recommended that HMRC improve support for users where CEST cannot determine a particular engagement’s status and include an assessment of ‘mutuality of obligation’ (MOO) within CEST.

The Government’s response reiterates that HMRC will accept CEST status determinations, provided that CEST’s questions are interpreted in line with HMRC’s guidance and the user’s inputs were – and remain – accurate. It also notes that HMRC compliance activity will assess whether CEST has been used appropriately where reliance is placed on its outputs. 

HMRC will improve how CEST users who receive an ‘unable to determine’ result are directed to additional guidance. However, in response to the enquiry’s recommendation that CEST include questions on MOO the Government say that CEST is predicated on MOO applying and that the user is directed to HMRC guidance on MOO in the Employment Status Manual. There are no proposals to include any specific questions on MOO.

In our view, this is a missed opportunity to respond to constructive criticism of CEST in relation to MOO. However, engagers who are (in our view understandably) concerned about CEST due to the absence of questions on MOO may instead decide to use alternative tools and take independent advice, which the Government’s response recognises are legitimate alternatives to help in arriving at an appropriate status determination.

Blanket status determinations and disputes

The Sub-Committee called for strong enforcement action against engagers who issue blanket status determination statements, and for HMRC to review how engagers conduct status appeals as part of their compliance activity.

This was accepted. Whilst role-based determinations for identical engagements are acceptable, the Government’s response makes clear that blanket determinations which do not take account of the facts of each specific engagement will not have been prepared with reasonable care (with the result that the relevant status determination is invalid, and the engager may be exposed to a withholding obligation).

HMRC’s compliance reviews include checking the determination process, typically based on sample testing engagements and their OPW status determination. Where HMRC identify blanket determinations, they will take steps to ensure that incorrect determinations are corrected. Also where there are weaknesses in systems and processes, HMRC will educate organisations and advise of best practice.

The Government’s response also confirms that HMRC’s compliance activities encompass enquiry into dispute resolution processes to determine whether the engager is taking ‘reasonable care’ in arriving at status determinations.

Umbrella companies and labour supply chain risk

The Sub-Committee was concerned that increasing use of umbrella companies due to the OPW reforms heightens the risk of businesses and contractors being exposed to ‘rogue’ operators, often offshore, who deliberately do not comply with their payroll withholding and other employment obligations. It called for the Government to establish the proposed new Single Enforcement Body (SEB) to regulate umbrella companies

The Government acknowledged these concerns and says that it will use responses to its call for evidence on the umbrella company market to inform its policy on regulating the umbrella company market. This will be shared with the Sub-Committee.

However, it remains unclear when Parliamentary time will be available to legislate for the new SEB.

Employment status and the Taylor Review

The Government noted the Sub-Committee’s concern that the Taylor Review’s proposals, which include defining employment for both tax and labour rights purposes, have not yet been implemented.

Whilst there was some assurance in the Government’s response that work is ongoing cross-Government on employment status and that more detail will be set out in due course, disappointingly, there was no indication as to what the timescale might be.

What should organisations do now?

There are several steps businesses should consider taking in light of the Government’s response to the House of Lords enquiry, and the end of HMRC’s ‘light touch’ OPW compliance approach for 2021/22. These include considering the following questions:

  • Are your systems, processes, and documentation robust? How confident are you that you can demonstrate that your decisions on OPW status are rigorous and considered on a case by case (or by role) basis? Can you prove to HMRC that how you used CEST or an alternative tool to reach a determination was appropriate?
  • Have you identified all off-payroll workers in your supplier base? Many organisations engage contractors outside their typical labour procurement routes. Are you comfortable that you’re compliant for this population? How will you ensure this remains up to date as more suppliers are engaged and other engagements evolve? Have you considered your position on outsourced services?
  • Do you reflect how engagements work day-to-day in your determinations? Determinations must be based on high quality information and revisited if how the engagement operates changes. Are line managers fully aware of how engagements work in practice and what to do if they change?
  • Are your policies understood internally and across the supply chain? Do your suppliers and colleagues understand your policies, processes, and procedures and what is expected of them?
  • How do you manage your supply chain risk? Can you demonstrate that your due diligence processes, and those of the suppliers you engage with, ensure that tax and workers’ rights obligations are met throughout the chain – particularly if the supply chain involves umbrella companies?
  • Can you demonstrate that your dispute process is effective? Have contractors and fee-payers been given opportunities to ensure you’ve considered their personal and business positions fully? Do you have a fair and compliant process to arrive at and communicate your decisions if appealed?
  • How have your systems and processes worked over the last year? How will you use the experiences of the last 12 months to update or refine your processes? Some organisations have commissioned independent reviews to ensure processes have bedded in as expected, could a similar exercise be right for your businesses?
  • Are you leveraging technology appropriately? Many organisations use technology solutions (like KPMG’s suite of OPW tools) to identify affected workers, share information, produce status determinations and resolve disputes. These can also capture and store relevant information for presentation to HMRC in the event of a review. If you’re not yet using technology, could this be an effective way to manage your OPW risk?

One of the authors of this article, Colin Ben-Nathan, gave evidence at the 6 December 2021 session of the House of Lords enquiry, sitting in his capacity as Chair of the Employment Taxes Committee of the Chartered Institute of Taxation.