New HMRC guidance: best practice in Off-Payroll Working (OPW)

HMRC have published detailed new guidance on OPW compliance for end-clients, intermediate agencies in the labour supply chain, and deemed employers. This is a significant development, as the new guidance effectively sets clear and extensive minimum compliance standards for organisations that must apply the OPW rules. In addition to detailing the principles that HMRC expect organisations to adopt, the guidance contains practical examples of best practice. Organisations should therefore benchmark their OPW systems and processes against these standards, address any weaknesses, and disclose and correct any errors identified. Organisations that do not do so might be viewed by HMRC as failing to take ‘reasonable care’, leading to a risk of significant liabilities and associated penalties should any OPW inaccuracies arise. This article summarises key aspects of the new guidance and what organisations that are responsible for operating the OPW rules should do next. 

Complying with the OPW rules can be challenging. For example, the National Audit Office reported that in 2020/21, public bodies disclosed £263 million paid, owed, or expected to be owed to HMRC in respect of OPW compliance failures – in all cases associated with failures to take reasonable care.

HMRC’s new guidance on complying with the OPW rules has been published specifically to help organisations understand what HMRC consider to be good practice – informed by their experience on compliance reviews since the 2017 public sector and 2021 private and voluntary sector reforms. It forms part of HMRC’s Guidelines for Compliance series, which is intended to help business understand HMRC’s expectations and avoid non-compliance.

Though extensive, HMRC do not intend the new guidance to be exhaustive. Rather, it should be used in conjunction with other resources (e.g. HMRC’s Employment Status Manual). Additionally, the new guidance does not set out a prescriptive end-to-end compliance process for organsiations to follow. Instead, HMRC expect each organisation to apply the principles set out in the new guidance appropriately depending on the scale and complexity of their own OPW activities.

Individuals with management responsibility for OPW compliance should therefore actively assess how best to apply HMRC’s new guidance to their own organisation’s specific circumstances and ensure they can demonstrate that reasonable care is taken to discharge OPW obligations.

Key topics covered by the new guidance, and a summary of key HMRC expectations, are set out below:

• Training: organisations should deliver robust internal training on all systems and processes for staff involved with status determinations and OPW compliance – depending on business needs this might be generic training supplemented with organisation specific content or a bespoke package developed with an external adviser;
• Record keeping: organisations must maintain detailed, current records that evidence they have rigorous decision-making processes that apply the OPW rules correctly;
• Assessing the requirements of new roles: organisations must have robust processes involving all relevant stakeholders that identify individuals working through their own intermediaries and demonstrate that reasonable care is taken to arrive at informed status determinations;
• Establishing the off-payroll population: HMRC expect to see supply chain due diligence that identifies all off-payroll workers based on accurate information and appropriate communication between internal stakeholders and external parties (e.g. agencies and service providers) – if there are umbrella companies in the supply chain HMRC recommend assurance be obtained that PAYE is operated correctly (see also our article on HMRC’s new guidance on working with umbrella companies);
• Contracted out services: organisations must consider each relevant service on its own merits and by reference to how the engagement is conducted, and not solely to its contractual terms. In particular, to determine whether it is a fully contracted out service and, if not, to assess where any OPW obligations may arise;
• Making status determinations: those who make status determinations must be well trained, supported by appropriate guidance, and know how to escalate difficult or finely balanced decisions. HMRC do not accept blanket determinations, and consider their use to be a deliberate failure to take reasonable care. Determinations must be re-assessed if there are material changes to the contractual terms or working conditions of an engagement;
• Managing contractor disputes over status: organisations must demonstrate that, at a minimum, representations from disputing contractors are considered, the withholding treatment remains unchanged whilst disputes are considered, and responses are issued within 45 days – OPW teams must be able to recognise a valid dispute (e.g., including disagreements raised in conversation, rather than only in writing);
• Operating PAYE: teams who manage the payroll process must understand what they are required to do, and be supported by guidance on calculating the amounts subject to PAYE/NIC; and
• Internal audit and periodic reviews: organisations must perform regular end-to-end audits/reviews of their OPW systems and processes – where relevant, considering how these interact with systems and processes for Senior Accounting Officer regime compliance and reporting – audits/reviews may be internal, external, or both.

We will publish further commentary on specific aspects of HMRC’s new guidance in due course.

Following the release of HMRC’s new guidance, organisations that engage contingent labour should review their OPW compliance approach against HMRC’s published expectations to ensure they can demonstrate it is comprehensive, robust, and fit for purpose.

HMRC clearly expect organisations to do so as they ask that any compliance errors found by reference to the new guidance are identified with the Guidelines for Compliance reference number GfC4 as part of the associated voluntary disclosure. This might suggest that where voluntary disclosures of OPW errors do not refer to the new guidance, HMRC might ask for confirmation that it has in fact been considered. If not, then when assessing penalties HMRC might consider that this suggests ‘reasonable care’ has not been taken. 

Please contact the authors, or your usual KPMG in the UK contact to talk through what HMRC’s new guidance means for your OPW compliance.

You can also read our coverage of Autumn Finance Bill provisions to offset certain taxes paid by workers and their personal service companies against the deemed employer’s liability where OPW withholding errors arise, and recent HMRC guidance on how HMRC expect organisations to exclude non-compliant umbrella companies from their labour supply chains.

For further information please contact:

• Colin Ben-Nathan
• Anne-Marie Robinson