All change… what next for Off-Payroll Working?
OPW is here to stay – but what developments should we anticipate over the next few years?
OPW is here to stay – but what developments should we anticipate over the next few years?
The Off-Payroll Working (OPW) rules, earmarked for abolition in the fiscal statement on 23 September 2022, have been retained. Public sector organisations, and large or medium sized businesses, will remain responsible for determining whether engagements with contractors’ Personal Service Companies (or other intermediaries, together ‘PSCs’) are within the scope of ‘IR35’. If so, and the worker would have been an employee for tax purposes had they been engaged directly, PAYE, NIC, and Apprenticeship Levy should be operated on payments to the PSC. In the short term it’s back to business as usual, but what developments should we anticipate in the coming years? This article shares our thoughts.
Increasing HMRC enforcement activity
When confirming that the OPW rules would continue, the Chancellor Jeremy Hunt said this was expected to save around £2 billion each year.
Clearly, OPW has been retained as a measure to protect tax revenue. And HMRC enforcement activity, particularly in the public sector, has certainly demonstrated that the stakes can be high when things go awry. For example, Government departments and agencies included a total of £263 million in their financial statements for failures to operate the OPW rules with ‘reasonable care’ during 2020/21 alone. We therefore expect HMRC enforcement activity to intensify in the coming years, with an increasing focus on large and medium-sized businesses. Whilst HMRC applied a ‘light touch’ to such businesses for the first year of OPW (to 5 April 2022), this ended some months back and HMRC will now be expecting that they are properly applying the rules.
In particular, it will be important that organisations can demonstrate they took ‘reasonable care’ where any errors or inaccuracies are identified. If not, HMRC will almost certainly seek penalties. And this isn’t limited to payroll withholding errors or inaccuracies made by the fee-payer. It also goes to the process of determining employment tax status.
When assessing whether an end-client takes ‘reasonable care’ arriving at status determinations, HMRC will consider whether appropriate account has been taken of the specific facts of each engagement together with how the dispute resolution process operates. If ‘reasonable care’ has not been taken, for example if blanket determinations are issued without full consideration of the relevant facts, affected status determinations are invalid and the end-client may be exposed to penalties, as well as to the relevant PAYE/NIC.
‘IR35’ case law – are you up-to-date?
We expect further developments in ongoing employment tax status cases, such as Atholl House Productions Ltd (the Kaye Adams case) and Professional Game Match Officials Limited (‘PGMOL’, the football referee case). In particular, in August PGMOL were given permission to appeal to the Supreme Court and the case will probably be heard some time in 2023.
Organisations should monitor the evolving body of case law carefully. Any developments in how the courts apply the employment tax status tests should be understood and reflected in status determinations, the dispute resolution process, and in internal training and risk management.
HMRC’s Check Employment Status for Tax (CEST) tool – time for a review?
HMRC will accept status determinations produced using CEST if:
- The questions are interpreted in accordance with HMRC’s guidance;
- The information entered is factually accurate and complete; and
- The determination produced is reassessed if there is any subsequent change in the relevant facts.
At the same time, where HMRC raise enquiries they will assess whether CEST has been used appropriately where organisations rely on its outputs, and yet HMRC data published last year suggests that CEST produces an ‘undetermined’ result (i.e. in borderline cases) 21 percent of the time, requiring further efforts outside CEST to establish whether an engagement is inside the OPW rules.
Given the Chancellor’s recent commitment to continuing the OPW regime, we would urge HMRC to review the CEST tool with a view to trying to reduce the number of ‘undetermined’ results. Albeit clearly organisations can use alternative tools and take independent advice, which the Government recognises are legitimate alternatives to using CEST.
Settling with HMRC - offset for taxes paid by the PSC/worker?
There is, currently, no statutory basis for offsetting any taxes paid by a worker or their PSC against any OPW payroll liabilities. This means that where payroll errors and inaccuracies are identified, the fee-payer (or in some cases the end-client) must settle the full amount that should have been withheld with HMRC, even though the worker or PSC might have paid tax on the relevant payments. In these circumstances, the worker and PSC are entitled to reclaim the relevant tax from HMRC. The fee-payer must then rely on any contractual protections they have to recover those amounts from the PSC – which might be some time after the engagement has ended.
Where, in practice, these amounts cannot be recovered from the PSC, the net cost of settling errors with HMRC will be increased. These are issues for organisations to be aware of in a transactional environment. However, HMRC have been working with stakeholders to consider how this issue might be addressed, and we very much hope that a statutory offset mechanism will be enacted in the near future. In the meantime, organisations should continue to focus on effective OPW compliance so as to minimise their exposure to PAYE, NIC, Apprenticeship Levy and associated penalties.
Future proofing your OPW compliance…
Organisations should consider how they can ensure their OPW systems and processes remain fit for the future.
Questions to consider include the following:
- How have your systems and processes performed so far? Determining OPW status can be complex – how do you know how well your systems and processes are working? Could an independent review ensure you’re in line with best practice amongst your peers and competitors? What learnings could strengthen your systems and processes for the future?
- Have you identified all off-payroll workers amongst your suppliers? Can you demonstrate that you’re compliant where you engage contractors outside your usual procurement routes? How do you ensure accurate oversight of this population as more suppliers are engaged and engagements evolve? What’s your position on outsourced services?
- Are your systems, processes, and documentation robust? Can you demonstrate that status decisions are rigorous and considered on a case-by-case (or by role) basis? Can you prove to HMRC that you use CEST or an alternative tool appropriately? Determinations must be based on high quality information and revised as/when the conduct of an engagement evolves – do your line managers have a clear line of sight to how engagements work in practice and know what to do if that changes?
- Are your policies understood within your organisation and across your supply chain? Do your suppliers and colleagues understand your policies, processes, and procedures and what they need to do?
- Can you demonstrate that you consider new case law and review existing determinations accordingly? Have you ensured that your approach to the case law tests is in line with the Court of Appeal’s decision in Atholl House Productions Ltd (as applied in the subsequent Alan Parry Productions Ltd case)? Do you appropriately consider relevant factors beyond mutuality of obligation and control in forming a view on the ‘business on own account’ test?
- Is your dispute resolution process effective? Are your contractors and fee-payers able to challenge your determinations appropriately? Can you demonstrate that their views are properly considered? Is your process to arrive at and communicate appealed decisions objectively fair and compliant?
- Is your internal training effective? Do the individuals responsible for operating your systems and processes have the necessary current knowledge to ensure you remain compliant?
- What’s your supply chain risk? Can you and your suppliers demonstrate appropriate due diligence to ensure that tax obligations and workers’ rights are observed throughout the chain? Do you understand any alternative business models proposed to you that could introduce risk into your supply chain? Do umbrella companies present any particular risks?
- Do you use technology to the fullest appropriate extent? If not, could this be an effective way to manage your risk? Can you use a solution (e.g. KPMG’s OPW solutions) to identify affected workers, share information, produce status determinations and resolve disputes? Do your current systems capture and store relevant information for presentation to HMRC in the event of a review?
Please contact the authors, or your usual KPMG in the UK contact, to talk through how KPMG could assist you to manage your OPW risks.