Off-Payroll Working: how would HMRC’s proposals assist when compliance errors arise?
From April 2024, deemed employers’ PAYE/NIC liabilities for Off-Payroll Working errors could be offset by taxes paid by contractors
Off-Payroll Working compliance changes
Large or medium sized private sector and public sector organisations must determine the tax status of workers they engage through personal service companies or certain other intermediaries (together ‘PSCs’). Where the worker would have been an employee of the end-client for tax and social security purposes had they been engaged directly, the fee-payer must operate PAYE, NIC and, where relevant, Apprenticeship Levy, on amounts paid to the PSC. Under current rules, if compliance errors arise, the fee-payer (or in certain circumstances, the end-client) is liable for the full payroll withholding due. However, HMRC are consulting on proposals that would allow any relevant tax and NIC paid by the PSC/worker on profits/income that derive from the relevant engagement to be offset against the deemed employer’s liability where withholding errors arise. This article summarises HMRC’s proposals, and what end-clients who engage contingent labour through PSCs, and intermediaries in the labour supply chain, should consider.
What’s the current position?
If the Off-Payroll Working (OPW) rules are applied incorrectly – for example the end-client incorrectly categorizes an engagement as being outside the OPW rules – the fee-payer (or, if different, the end-client if it did not take reasonable care in arriving at its status determination), is liable for the full payroll withholding due.
Currently, HMRC are unable to reduce this liability by offsetting any tax or NIC paid by the PSC or worker on amounts that derive from the relevant engagement.
Instead, to avoid collecting more tax and NIC than are due, where possible HMRC will notify the PSC and the worker that an engagement was within the OPW rules, that the deemed employer is therefore liable to account for PAYE and employee’s NIC, and that any relevant taxes paid on the PSC’s trading profits or on the worker’s income (e.g., any salary and/or dividends paid by the PSC) that derive from the engagement can be reclaimed.
Unless the deemed employer can enforce any contractual indemnities given by the PSC, this can result in the PSC/worker in effect receiving tax free profits/income and the deemed employer bearing the full cost of any compliance errors.
What are the proposed changes?
Following informal consultations with key stakeholders, including KPMG, HMRC now propose crediting certain amounts paid by the PSC/worker against any PAYE and employee’s NIC liability of the fee-payer (or end-client) that arises from a failure to operate the OPW rules correctly.
No offset will be made against any employer’s NIC or any Apprenticeship Levy liabilities as these are costs that an employer could not, generally, recover from an employee, so should be borne by the deemed employer.
Amounts that may be offset include:
- Any corporation tax paid by the PSC on profits that derive from the engagement;
- Any income tax and employee’s NIC paid on the relevant worker’s earnings that derive from the PSC’s income from the engagement; and
- Any income tax paid by the relevant worker on dividends received from the PSC which were paid out of the profits from the engagement.
However, in some cases, HMRC may be unable to determine which taxes paid by a PSC/worker derive from a particular OPW engagement without investigations that are unduly onerous for HMRC, the fee-payer (or end-client), and the PSC/worker. In those circumstances, HMRC may allow an offset based on reasonable assumptions (e.g. concerning the PSC’s various sources of income and business expenses).
Where the PSC/worker has paid relevant taxes and NIC, HMRC will direct that the relevant amounts be credited against the deemed employer’s PAYE/NIC liability.
The PSC/worker will be able to appeal against an offset direction in specific circumstances (e.g., if the information in the direction notice on what relevant taxes have been paid is factually incorrect). They will not, however, be able to appeal an offset direction on the basis that they dispute HMRC’s conclusion on the OPW status of the relevant engagement.
Any penalties HMRC might impose for non-compliance would be based on the deemed employer’s total PAYE and NIC liability before any available offset.
If the relevant PSC/worker cannot be identified on HMRC’s systems, or the PSC/worker has not submitted relevant tax returns or paid any relevant taxes or NIC, no offset could be given.
When do these changes take effect?
If these proposals are enacted in their current form, they would apply to PAYE and employee’s NIC assessed by HMRC on or after 6 April 2024 in relation to OPW compliance errors that arise on or after 6 April 2017.
Settlements agreed prior to 6 April 2024 would be concluded on the current basis (i.e., without any relevant taxes paid by the PSC/worker being offset against the deemed employer’s liability).
What should organisations consider?
A statutory basis for offsetting any relevant taxes and NIC paid by a worker or their PSC against the deemed employer’s liabilities where OPW errors arise is undoubtedly good news, but it can only provide a partial protection against irrecoverable PAYE and employer’s NIC exposures as:
- No offset can be made if HMRC cannot trace the relevant PSC/worker on their systems, or where relevant tax returns have not been submitted or relevant tax or NIC have not been paid; and
- Where an offset is available, it is unlikely to reduce the deemed employer’s PAYE and employee’s NIC liability to nil, and employer’s NIC (and where relevant Apprenticeship Levy) liabilities will remain.
Organisations must therefore ensure that their approach to OPW compliance remains rigorous and robust.
Where errors do arise, organisations should ensure they are able to manage these appropriately to minimise their financial exposure and reputational risk. Questions that end-clients and other organisations in the contingent labour supply chain could consider include:
- Do we collect and hold information which would enable HMRC to trace relevant PSCs/workers to issue offset directions if errors arise? HMRC will need information to identify relevant PSCs/workers on their systems and confirm whether any relevant taxes or NIC are available for offset (e.g. the PSC’s name, address, VAT and company registration numbers, and the worker’s name, address, date of birth and national insurance number) – are you collecting this information now? If not, what changes should you make to systems and processes to capture it, and what steps could now be taken to collect it for ongoing and historical engagements? Any guidance HMRC issue confirming the specific information they are likely to require should be reviewed when available;
- Are our contractual protections robust? The deemed employer is still likely to have residual PAYE and employee’s NIC liabilities, even after any available offset, where OPW compliance errors arise – do your contractual protections allow you to recover those amounts from the PSC (this often being some time after the engagement has ended)?; and
- Can we demonstrate reasonable care in our OPW compliance? This remains critical to minimising any penalties that might arise in connection with OPW errors – our earlier article on HMRC’s enforcement regime includes specific points organisations can consider to assess whether they could demonstrate ‘reasonable care’.
What happens next?
The consultation on the proposed offset mechanism closes on 22 June 2023.
Please contact the authors, or your usual KPMG in the UK contact, if you would like to talk through what implications these proposals might have for your business, or any points you would like us to consider reflecting in any consultation submissions that we make to HMRC.
HMRC are expected to publish a summary of the consultation responses they receive and confirm what proposals will be taken forward later in the year.