FB 2024: Off-Payroll Working (OPW) offset confirmed
Deemed employers’ liabilities for OPW errors will be reduced by tax and employee’s NIC paid by contractors – but practical questions remain
Offset confirmed, but details awaited
Where the OPW rules apply to an engagement, the ‘deemed employer’ (i.e., generally the fee-payer) must operate payroll withholding on amounts paid to workers’ personal service companies/other intermediaries (together, ‘PSCs’). Currently, the deemed employer is liable in full for any payroll withholding lost due to errors applying the OPW rules. However, from 6 April 2024, HMRC can offset certain taxes paid by PSCs/workers against a deemed employer’s liabilities for payroll withholding errors. This will apply to withholding errors on payments made to PSCs on or after 6 April 2017. The Autumn Finance Bill includes a clause allowing HMRC to make relevant regulations. These have yet to be published, so uncertainty remains over the specific details of the offset. This article summarises our current understanding and what organisations that are required to operate the OPW rules should consider in situations where offset may apply.
Background
If OPW withholding errors arise, the deemed employer is currently liable to pay all the outstanding PAYE, NIC and, where relevant, Apprenticeship Levy, to HMRC, regardless of what taxes might have been paid by the PSC or worker in connection with the relevant payments. The PSC and worker are then able to claim credits in respect of the relevant taxes/NIC settled by the deemed employer against their own tax/NIC liabilities.
Unless the deemed employer can recover those amounts by enforcing contractual protections against the PSC, this can result in the deemed employer bearing the full cost of any compliance errors and the PSC/worker, in effect, receiving tax free profits and income.
To address this, and following consultation, HMRC proposed a new mechanism to offset certain taxes and employee’s NIC paid by PSCs/workers against deemed employers’ liabilities for OPW payroll withholding errors. Though the new offset will be introduced from 6 April 2024, it will apply to relevant payroll withholding errors that arose on or after 6 April 2017.
To allow for deemed employers with ongoing OPW compliance checks to benefit from the new offset once introduced, HMRC will defer settling current enquiries provided certain conditions are met (see our earlier article for more details).
How will the offset work?
The Finance Bill contains a clause that, if enacted in its current form, would permit HMRC to make regulations for offsetting any income tax and/or corporation tax that HMRC can trace which has been paid, or assessed, in respect of income referrable to a payment from a deemed employer under the OPW rules. HMRC will be able to calculate any available offset based on the best estimate that can reasonably be made of the income tax or corporation tax referrable to relevant payments to the PSC.
As the Finance Bill only empowers HMRC to make PAYE regulations, we await publication of those regulations, and corresponding social security regulations in relation to NIC, to confirm the detail of how the new offset will work.
HMRC guidance on the practicalities of how the offset will work is also required (e.g., on when and how HMRC will arrive at ‘the best estimate that can reasonably be made’ of amounts paid by the PSC/worker that are available for offset, and what information the deemed employer must give HMRC to let them trace relevant payments of tax/NIC from the PSC/worker).
In the meantime, based on previous HMRC statements, we understand the amounts that will be available for offset against the deemed employer’s liability will include any:
- Corporation tax paid by the PSC on profits derived from the relevant OPW engagement;
- Income tax and employee’s NIC paid on the worker’s earnings that derive from the PSC’s income from the relevant OPW engagement; and
- Income tax paid by the worker on PSC dividends paid from the profits of the relevant OPW engagement.
Any employer’s NIC and Apprenticeship Levy paid by the PSC would not be available for offset against the deemed employer’s liabilities as, had the worker been engaged directly as an employee, those costs would be borne by the employer and could not be recovered from the employee.
The PSC/worker would not be able to appeal HMRC’s conclusion that an engagement is within the OPW rules as part of this process but would be able to appeal the amount HMRC determines is available for offset.
No offset would be available if HMRC cannot trace the PSC or worker on their systems, or no relevant taxes or employee’s NIC have been paid.
Any penalties HMRC impose on the deemed employer for payroll withholding errors would be based on the total PAYE and employee’s NIC liability before any available offset.
What happens next?
We will publish further comments on the detailed operation of the prospective OPW offset once this has been confirmed.
Once HMRC set out what information they will need to trace PSCs/workers and any relevant tax/NIC payments to confirm what offsets are available, deemed employers should review the information they hold on PSCs/ workers and consider:
- What outstanding information it might be possible to obtain in relation to current and historical engagements; and
- What changes should be made to existing processes to collect relevant information for future engagements.
However, whilst the new offset is welcome, it is not a substitute for robust OPW compliance. Deemed employers should therefore also ensure that their OPW compliance processes are effective. Points to consider include:
- Are your contractual protections robust? Notwithstanding the new offset, the deemed employer is likely still to have some PAYE and employee’s NIC liabilities after any offset – could these be recovered from the PSC, potentially some time after the end of the relevant engagement?; and
- How could you demonstrate to HMRC that you take reasonable care in your OPW compliance, particularly following the recent publication of what HMRC consider to be good practice (which is crucial to minimise penalties for any OPW errors that arise)?
Please contact the authors or your usual KPMG in the UK contact to talk through what the prospective offset mechanism might mean for your OPW compliance.
You can also read our coverage of HMRC’s recently published guidance on good practice in OPW compliance, and on how HMRC expect organisations to exclude non-compliant umbrella companies from their labour supply chains .
