Off-Payroll Working (OPW): should you pause your compliance check?

Public sector organisations, and large or medium sized businesses, must determine the tax status of workers engaged through personal service companies and some other intermediaries (collectively ‘PSCs’). Where a worker would have been the end-client’s employee for tax/NIC purposes had they contracted directly, the fee-payer must operate payroll withholding on amounts paid to the PSC. Currently, the fee-payer, or in some cases the end-client, must settle the full amount of any payroll withholding lost due to any compliance errors. However, under current proposals, from 6 April 2024 any relevant tax/NIC paid by the PSC/worker on profits/income from an engagement might be credited against the deemed employer’s outstanding withholding liability. Provided certain conditions are met, HMRC are now allowing organisations to defer settling ongoing OPW compliance checks so they can benefit from any available credit if the proposed new offset is adopted from 2024/25. This article sets out what organisations should consider.

If OPW withholding errors arise, the fee-payer or, if different, the end-client (if it didn’t take care arriving at the relevant status determinations), must settle the full payroll withholding due. Currently, this must be done without any reduction for any taxes paid by the PSC/ worker on profits/ income that derive from the relevant engagements.

Unless the deemed employer can enforce any indemnities given by the PSC, this can mean that the deemed employer bears the full cost of any OPW compliance errors and the PSC/worker, in effect, receives tax free profits/income.

However, proposals that are currently before Ministers would, if adopted, let HMRC credit certain amounts paid by PSCs/workers against outstanding liabilities of the fee-payer (or end-client) that arise from operating OPW payroll withholding incorrectly (see our previous article for more details). 

If the new offset is adopted in its current form, it will apply to amounts assessed by HMRC on or after 6 April 2024 in relation to OPW compliance failures that arise on or after 6 April 2017. Any settlements agreed before 6 April 2024 would be concluded without any taxes paid by the PSC/worker being offset against the deemed employer’s liability.

However, HMRC are now writing to organisations with ongoing OPW compliance checks offering – provided certain conditions are met – to pause settlement so they can benefit from any available reduction should the proposed offset mechanism be introduced.

If HMRC agree to pause an OPW compliance check, and the proposed offset mechanism is in fact introduced, HMRC will write to affected organisations after 6 April 2024 to confirm any available offset and agree settlement.

HMRC may consider pausing an OPW compliance check to let settlement take place after the proposed offset is introduced if:

• The compliance check has reached the stage where settlement could occur;
• The organisation has acknowledged, in writing, that there has been an error in their applying the OPW rules;
• The gross payroll withholding liability, including any penalty HMRC might impose, has been agreed; and
• HMRC have been provided with the following information for each relevant engagement:
  • The PSC’s name and company registration number; and
  • The worker’s full name and national insurance number.

If company registration and national insurance numbers are unavailable, it is currently uncertain whether HMRC would accept any alternative unique identifiers (e.g. VAT registration numbers or self-assessment Unique Taxpayer References).

Organisations that are considering deferring settlement of an OPW compliance review should bear in mind that:

• It has not yet been confirmed that the proposed offset will in fact be introduced; and
• Even if an offset is available, it is unlikely to reduce the deemed employer’s payroll withholding liability to nil.

Therefore, organisations that agree with HMRC to pause an OPW compliance check are still likely to end up liable to pay some amount to close the enquiry.

That said, where the relevant conditions can be met, pausing settlement of an ongoing OPW compliance review should nevertheless put the deemed employer in the best possible position to benefit from any offset of relevant taxes/NIC paid by the PSC/worker that might become available.

Organisations that choose to pause an OPW compliance check should consider making a payment on account for their maximum potential liability (i.e. ignoring the availability of any potential offset) to prevent further interest on late payment accruing.

Further points to consider on OPW compliance generally are summarised in our previous article.

Please contact the authors, or your usual KPMG in the UK contact, if you would like to talk through what implications HMRC’s offer to pause an OPW compliance review might have for you.

For further information please contact:

• Colin Ben-Nathan
• Anne-Marie Robinson