Repeal of the Off-Payroll Working rules – what are the key issues?
The Off-Payroll Working rules will be repealed from 6 April 2023, but what are the key issues and how will you address them?
The Off-Payroll Working rules will be repealed from 6 April 2023...
NB: This article was published before the Chancellor announced on 17 October 2022 that the Government is now not proceeding with the repeal of the off-payroll working rules.
Under the Off-Payroll Working (OPW) rules, organisations that engage workers through personal service companies or certain other intermediaries (together, ‘PSCs’) must determine whether the engagement falls within ‘IR35’ – the underlying tax regime for workers who would be employed for tax purposes if engaged directly by their end client. Under the OPW rules, where IR35 applies, payments to the PSC must be processed via payroll subject to PAYE, NIC, and (where appropriate) Apprenticeship Levy. However, the Chancellor announced on 23 September 2022 that the OPW rules (but not the underlying IR35 legislation) would be repealed from 6 April 2023. This article sets out what organisations that presently operate the OPW rules should consider in determining what impact – if any – OPW repeal will have on their workforce strategy and implementation.
What’s your direction of travel?
Your workforce strategy must comply with your tax, NIC, and employment rights obligations, and align with your organisation’s Environmental, Social, and Governance agenda. But your tax obligations will change from 6 April 2023 when the OPW rules are repealed.
What impact will this have on your ability to maintain a flexible and cost-effective workforce, and will your policy decisions over the next 6 months make that easier – or more difficult?
Different sectors will experience different issues, and each organisation must consider the potential impact of the repeal of the OPW rules on their specific circumstances and commercial requirements. However, it’s clear that the evolving labour market, changing ways of working, and legal developments since OPW was introduced (e.g. the Corporate Criminal Offence (CCO) of facilitating tax evasion) mean that, for public sector and large or medium sized businesses, the repeal of the OPW rules does not necessarily signal a return to previous ways of engaging talent. There’s no ‘one size fits all’ approach, but organisations may want to map out the opportunities and threats this change presents by framing questions on their post-April 2023 workforce strategy around compliance, cost, flexibility, and governance.
How do we keep compliant?
Compliance should be a key part of your transition planning, as it shapes your approach to both the end of OPW in the short term, and design of your new model for the longer term. Some questions to work through include:
- What’s our approach for the next six months? You must meet your OPW obligations until 6 April 2023 and, to minimise the risk of penalties for any errors or inaccuracies that might arise in 2022/23, be able to demonstrate ‘reasonable care’;
- Do we have any ongoing exposures? Generally, PAYE determinations can be made for up to four years, or six years in cases of ‘carelessness’, from the end of the relevant tax year (e.g. for 2022/23 until 5 April 2027 or 2029 respectively). OPW exposures could also impact future due diligence (e.g. on an IPO), and internal auditors might also review compliance where potential liabilities appear material – it’s therefore critical to ensure your OPW compliance is robust; and
- What obligations will we have after the OPW rules are repealed? From 2023/24 workers who operate through PSCs will be responsible for determining whether IR35 applies and paying the correct tax and NIC, but HMRC have also said they will keep compliance “closely under review” and it is presently unclear to what extent this may involve end-clients. We expect HMRC to issue guidance on this in due course but in any event they are still likely to approach end-clients for information where they raise enquiries into PSC compliance with IR35. For this and other reasons (see below) there may be aspects of your current OPW systems and processes that you would want to retain beyond 6 April 2023, even if the formal requirements under OPW (e.g. to complete OPW status determinations) fall away.
What about your costs?
The Government has said that the repeal of the OPW rules aims to “free up time and money for businesses that engage contractors”, so cost savings are key, but potential issues to consider include:
- How can we validate any IR35 premium on day rates? Your OPW status determinations should cover existing roles with your organisation, but do you need to retain capability to assess whether new roles are within IR35 to test contractors’ claims?;
- How can we demonstrate that we don’t benefit from non-compliance? How could you demonstrate to stakeholders that any savings you realise are fair, i.e. not as a result of poor compliance, active avoidance or, potentially, evasion in your supply chain? What steps should you take to ensure compliance and how will you enforce this?; and
- Should we still engage agencies? Agencies in your supply chain can add cost, but also bring advantages such as reaching a wider talent pool.
How flexible can you be?
How flexible you are post-repeal of the OPW rules could influence how effectively you attract key talent – but there could be trade-offs on compliance risk and governance. In particular:
- Will we let workers revert to PSCs? If you have assessed some roles with your organisation as within IR35, will you let those workers move away from, say, employment by an ‘umbrella’ company back to PSCs? Is there a CCO risk? Could you be perceived as increasing the risk of non-compliance, allowing some workers to gain a tax advantage that stakeholders’ might question? What’s the reputational impact? Should your approach differ between different worker populations?;
- What contracting checks will we need? Identifying which party you engage with will remain important, as if, for example, you engage sole traders (i.e. direct engagement rather than through a PSC), the payroll risks sit with you – regardless of the repeal of the OPW rules. Should you therefore retain the rigour of your OPW identification procedures (and technology) to manage this risk?; and
- What’s our competition doing? If other organisations are prepared to be more flexible in how they engage contingent talent, you might be at a competitive disadvantage. Do you know what practice is emerging in your sector? You might need to keep this under review and be prepared to adapt.
What about governance?
Governance is central to managing financial, commercial, and reputational risk. So points to consider include:
- What supply chain visibility do we want? Many organisations welcomed the enhanced oversight of labour supply chains that OPW compliance processes brought – what could you retain that adds value without unnecessary administration?;
- What’s our duty of care towards contractors? IR35 assessments can be complex, and from 6 April 2023 contractors will need to assess their own positions based on nuanced and evolving case law – what support, if any, do you want to offer contractors who struggle to assess their status or deal with HMRC enquiries? A clear policy is advisable; and
- How do we demonstrate our supply chain is secure? Can you demonstrate that your due diligence process, and that of the suppliers you engage with, is effective in ensuring that tax obligations and workers’ rights are adhered to throughout the supply chain – particularly if it involves umbrella companies?
Will the OPW rules be re-introduced?
The OPW rules were introduced to address HMRC’s concerns that only 10 percent of PSCs within IR35 actually applied the rules correctly. Indeed, based on the Government’s ‘Growth Plan 2022’, the estimated cost of their repeal is £1.111 billion in 2023/24 rising to £2.045 billion in 2026/27.
So how effective will HMRC’s enforcement of IR35 at the PSC level be from 6 April 2023? Certainly, in deciding to introduce the OPW rules, HMRC’s view was that they did not have the necessary resources to police IR35 as it stood, and the OPW rules were designed to recoup the PAYE/NIC that was being lost to the Exchequer. If HMRC cannot adapt their approach at the PSC level to collect that PAYE/NIC, will a future Government decide to reintroduce the OPW rules or a variation on them? When planning their post-April 2023 strategy, organisations may therefore want to consider what systems and processes might be ‘mothballed’ with the aim of mitigating future costs on any re-introduction of OPW type rules.
Determining how best to move forward with your workforce strategy in light of the repeal of the OPW rules is a complex question. And approaches will inevitably differ from sector to sector, and between organisations.
We will continue to share our thinking on this important change. In the meantime, please contact us if you’d like to discuss what it could mean for your organisation, or how KPMG in the UK could assist as you prepare for the repeal of the OPW rules from 6 April 2023.