House of Lords reports on enquiry into private sector Off-Payroll Working reform

What were the House of Lords’ key conclusions and recommendations?

What were the House of Lords’ key conclusions and recommendations?

The House of Lords Finance Bill Sub-Committee has reported on its follow-up enquiry into how the private sector Off-Payroll Working (OPW) reforms were implemented, and how they operate in practice. This article summarises key conclusions and recommendations to HMRC in three areas. HMRC were asked to respond to the Sub-Committee’s recommendations by 9 March 2022. Organisations should consider what steps may need to be taken in light of the Sub-Committee’s comments, particularly as HMRC’s enforcement activity is expected to intensify from April 2022.

Determining status – the CEST tool

The Sub-Committee acknowledged the importance of HMRC’s Check Employment Status for Tax (CEST) online tool, as HMRC will accept status determinations based on CEST provided its questions are interpreted in line with HMRC guidance, responses are based on accurate and complete information, and assessments are revisited as and when circumstances change.

However, the enquiry also noted CEST’s limitations and commented that, in HMRC’s compliance work, they should accept that using other means to assess employment status is both reasonable and legitimate. It also recommended that HMRC should improve the support they offer in the 20 percent or so of cases where CEST cannot determine a result.

Additionally, the Sub-Committee recognised that not all engagers have confidence in CEST’s assessments, as these do not currently consider mutuality of obligation (broadly, whether an engager is obliged to offer work and the worker is obliged to do it). The report recommends that HMRC work with stakeholders to modify CEST so that it properly considers this test.

More broadly, the Sub-Committee is concerned that some engagers do not comply with their obligation to assess status on a case-by-case basis instead taking a ‘blanket’ approach, and that client-led status disagreement processes might not properly consider contractors’ appeals. It therefore recommends that HMRC take stronger enforcement action against engagers who issue blanket assessments, and also that compliance activity focusses on how engagers handle appeals.

These recommendations highlight the need for businesses to review the robustness of their OPW processes, particularly in respect of status determinations and appeals, and how these actually work in practice.

Umbrella companies and increased risks in the labour supply chain

Most ‘umbrella’ companies, which employ temporary workers on behalf of an agency that provides those workers to clients, perform a valuable role in the labour supply chain and comply with their payroll withholding and other obligations.

However, the Sub-Committee found that some operators, often offshore, are deliberately non-compliant. These expose workers and engagers to significant financial and reputational risks when HMRC pursue PAYE/NIC which has not been appropriately accounted for. The Sub-Committee was particularly concerned that the proliferation of umbrella companies in response to the OPW changes has increased the risk of businesses and workers becoming involved with rogue operators. It therefore urges the Government to legislate for the proposed new Single Enforcement Body to regulate umbrella companies.

In the meantime, businesses should review their labour supply chain due diligence to confirm their procedures – and those of the labour suppliers they engage with – ensure that both tax and employment/worker rights obligations are met throughout the chain.

Implementing the proposals in the Taylor Review?

The Sub-Committee considered that achieving fairness between workers “who are essentially doing the same job” cannot be restricted to the amount of tax and social security paid, i.e. that the Government should address the position on employment rights as well. And more broadly that it should “press ahead with implementing the proposals set out in the Taylor Review as the Sub-Committee recommended in its 2020 report” – this to include “defining employment status for both tax and employment rights purposes”.

We agree that it would be helpful to revisit what we mean by ‘employment’ for tax and employment law purposes, and indeed in responding to the Taylor Review in February 2018, the then Government indicated that “it was committed to improving clarity and certainty in this area” and that “this will include consideration of legislative options”. As we emerge from the pandemic, hopefully this is something that will rise up the list of the Government’s priorities.

What happens next?

Our coverage of the enquiry’s evidence sessions is available here, and the House of Lords report is available here. The Financial Secretary to the Treasury has been asked to provide a detailed response by 9 March 2022.

We will report on any important developments set out in that response.

One of the authors of this article, Colin Ben-Nathan, gave evidence at the 6 December 2021 session of the House of Lords enquiry, sitting in his capacity as Chair of the Employment Taxes Committee of the Chartered Institute of Taxation.