Off-Payroll Working (OPW): HMRC consult on the offset mechanism

If the OPW rules apply to an engagement, the ‘deemed employer’ (usually the fee-payer) must operate PAYE and National Insurance Contributions (NIC) (and Apprenticeship Levy, where relevant) on amounts paid to a worker’s personal service company or other intermediary (together, ‘PSCs’). The deemed employer is currently liable for all payroll withholding lost due to any errors made in applying the OPW rules. However, from 6 April 2024, HMRC will be able to offset certain taxes paid by workers and their PSCs against a deemed employer’s PAYE liabilities for any errors. This will apply to any withholding errors on payments made to PSCs on or after 6 April 2017. HMRC are now consulting on draft PAYE regulations and guidance to implement the OPW offset. The consultation closes on 22 February 2024. This article summarises the specific proposals currently subject to consultation and what organisations that are required to operate the OPW rules need to consider.

Deemed employers are currently liable to HMRC for all the outstanding PAYE, NIC and, where relevant, Apprenticeship Levy, that relate to OPW withholding errors, regardless of what taxes have been paid by a PSC or worker in relation to the relevant payments. 

The PSC and worker can then claim a credit for the income tax, NICs and corporation tax paid that is referrable to the income which should have had PAYE operated on it by the deemed employer.

This can mean that the deemed employer bears the full cost of any OPW compliance errors, and the PSC and/or worker – in effect – receive tax free profits and/or employment/dividend income for the relevant engagement.

However, the current Finance Bill contains provisions that, when enacted, will let HMRC offset relevant taxes and NIC paid by, or assessed on, PSCs/workers in relation to payments received from a deemed employer that fall within the OPW rules. The offset will apply from 6 April 2024 to relevant payroll withholding errors that arose on or after 6 April 2017. To allow deemed employers with ongoing OPW compliance checks to benefit from the offset, HMRC will defer settling current enquiries in certain circumstances (see our earlier article). 

HMRC have now published for consultation the draft PAYE regulations and draft guidance on when the legislation applies, the offset process, and appeals. The consultation closes on 22 February 2024.

The draft guidance also clarifies that HMRC will offset relevant NIC paid by a PSC or worker against the deemed employer’s liability using current NIC legislation (i.e. no legislative changes are required).

In summary, HMRC will be able to issue a PAYE offset direction if:

• Income tax or corporation tax has been paid or assessed in respect of a payment to a PSC which, subsequently, is found to be a ‘deemed direct payment’ within the OPW rules;
• HMRC have received a tax return that includes an amount of income/corporation tax that appears to be referrable to the relevant deemed direct payment; and
• A ‘trigger event’ occurs on or after 6 April 2024.

‘Trigger events’ include HMRC issuing a PAYE determination to the deemed employer, and the deemed employer making a written offer to HMRC to settle a PAYE failure in respect of a deemed direct payment.

The amounts HMRC will be able to offset against a deemed employer’s OPW payroll withholding liabilities include:

• Corporation tax assessed or paid on PSC profits derived from relevant deemed direct payments;
• Income tax and/or employee’s NIC assessed or paid on workers’ remuneration derived from relevant deemed direct payments; and
• Income tax paid or assessed on dividends paid out of PSC profits that derive from relevant deemed direct payments. 

The draft PAYE regulations recognise that HMRC might hold only incomplete information about the PSC’s and worker’s tax affairs, so let HMRC calculate any offset based on “the best estimate which can reasonably be made” of the amounts of relevant income/corporation tax paid or assessed. This will be based on the information included in relevant tax returns filed by the PSC and worker, and presumably any other information available to HMRC.

Any ‘best estimate’ of an available offset therefore depends on the circumstances of each individual PSC and worker (see also what organisations should consider below). In particular, the draft guidance states that HMRC will not apply a flat-rate offset to all PAYE liabilities.

The draft guidance suggests that HMRC will take the same ‘best estimate’ approach in relation to any relevant employee’s NIC paid by the worker; and confirms that any employer’s NIC paid by the PSC would not be offset against the deemed employer’s liabilities. We presume that this would also be the case in respect of any Apprenticeship Levy payable by the deemed employer.

No PAYE offset will be available if HMRC cannot trace the PSC or worker on their systems, if HMRC cannot confirm that the PSC/worker has paid any relevant taxes or employee’s NIC, or if the PSC or worker successfully appeals against an offset direction.

The draft guidance states that HMRC will, at a minimum, require the following information to trace PSCs and workers on their systems:

• The worker’s full name or National Insurance Number (NINO);
• The PSC’s name; and
• The PSC’s company registration number or, where applicable, its VAT registration number.

The PSC or worker will not be able to appeal HMRC’s decision that an engagement is within the OPW rules, but will be able to appeal the amount HMRC determine is available for offset if:

• The PSC or worker did not receive the relevant deemed direct payments;
• No tax has been paid on the relevant deemed direct payment;
• No trigger event has occurred; or
• HMRC’s calculation of the amount available for offset is incorrect.

If HMRC cannot issue an offset direction in relation to a particular PSC/worker, for taxpayer confidentiality the deemed employer will not be told the reason.

Organisations that engage contingent labour through intermediaries, and which would be the ‘deemed employer’ should a particular engagement be found to be within the OPW rules, should check whether they currently hold the minimum information on PSCs and workers that HMRC’s draft guidance says would be required to identify them on HMRC’s systems.  This will allow them to confirm whether, in the relevant circumstances, an offset would be available. This includes considering:

• What additional information might it be possible to collect to improve the likelihood of HMRC being able to identify PSCs/workers on their systems (i.e., information over and above the minimum set out in the draft guidance, such as PSCs’ PAYE references and workers’ unique taxpayer references);
• 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.

Organisations should also consider whether changes could be made to their contractual terms to maximise the likelihood of HMRC being able to confirm that relevant taxes have been paid or assessed in relation to an amount subsequently found to be a deemed direct payment – for example, by requiring PSCs and workers to file all relevant tax returns and pay all relevant tax by the statutory deadlines, perhaps with elevated level of disclosure relating to the engagements assessed by the end-client as being outside the OPW rules.

These points should be considered along with other labour supply chain best practice (e.g., HMRC’s guidance on good practice in OPW compliance, and on how HMRC expect organisations to exclude non-compliant umbrella companies from their labour supply chains).

We welcome the new OPW offset, and HMRC’s engagement with stakeholders in its design and implementation. However, the potential availability of the offset does not remove the need for robust OPW compliance. Accordingly, deemed employers should ensure that their OPW compliance processes are effective, which includes considering whether:

• Your contractual protections are robust – even if an offset is available, the deemed employer is likely still to have some residual PAYE and employee’s NIC liabilities which it may want to recover from the PSC and so the contractual position should be clear on this point; and
• You could demonstrate to HMRC that you take reasonable care with OPW compliance, reflecting the published guidance on what HMRC consider to be best practice  (this is vital to minimise penalties for any OPW errors that arise).

The consultation closes on 22 February 2024, and we are currently considering our response. Please contact your usual KPMG in the UK contact if you would like to discuss the potential impact HMRC’s proposals might have for you, or any matters you would like us to consider reflecting in any consultation submissions we might make.

For further information please contact:

• Colin Ben-Nathan
• Anne-Marie Robinson