Off-Payroll Working: are you ready for HMRC’s new enforcement regime?

The new Off-Payroll Working (OPW) or ‘IR35’ rules for large and medium sized private sector organisations came into effect on 6 April 2021, following public sector reforms in April 2017. These require organisations to determine the tax status of workers engaged through personal service companies or certain other intermediaries (collectively ‘PSCs’). The labour costs of workers who would be employed for tax purposes were they engaged directly by their end client should be paid via payroll. This article looks at the ending of HMRC’s initial ‘light touch’ enforcement strategy on 6 April 2022, and the prospect that HMRC will now be imposing penalties for non-compliance with the OPW regime without this leniency. It considers what organisations could do to help demonstrate that they take ‘reasonable care’ when determining the tax status of engagements and resolving status disputes with workers. 

How has HMRC’s enforcement strategy changed?

Broadly, if OPW withholding errors arise, HMRC will seek to recover the PAYE, NIC, and any Apprenticeship Levy that is due either from (i) the fee payer or, (ii) the end client, where the end client didn’t take ‘reasonable care’ when determining the status of the relevant engagement. These sums are currently due without any reduction in respect of taxes and/or social security paid on the relevant amounts by the PSC/worker directly. Albeit we know that HMRC are presently considering the possibility of introducing a mechanism to allow for at least some offset in this respect.

Other than for deliberate non-compliance with the new rules, HMRC did not impose penalties for OPW inaccuracies that arose before 6 April 2022. This was part of HMRC’s strategy to encourage organisations to review their new compliance processes – and refine them – based on their experiences in the first year of the new private sector regime.

However, this ‘light touch’ approach to penalties ended on 6 April 2022.

Where OPW errors arise on or after that date due to the end client or fee payer failing to take ‘reasonable care’, HMRC could charge penalties of up to 30 percent of the tax and social security at stake, with penalties of up to 100 percent for deliberate non-compliance or potentially more if there is an offshore connection.

So what should organisations now be thinking about?

Applying the OPW rules can be complex. For example, in February 2022 a National Audit Office investigation noted that, for 2020/21 alone, Government departments and agencies disclosed a total of £263 million paid, owed, or thought to be due in relation to failure to operate the public sector OPW rules with ‘reasonable care’. This included lack of reasonable care when preparing status assessments using HMRC’s Check Employment Status for Tax (CEST) tool, i.e., failing to interpret the questions in line with HMRC’s guidance and/or ensuring the responses were, and remained, accurate (in its recent report Lessons from implementing IR35 reforms, the Public Accounts Committee express concern that public sector non-compliance might be much more widespread than even this figure suggests).

Accordingly, going forward we similarly expect HMRC’s compliance approach to focus, in particular, on whether organisations have taken ‘reasonable care’ where OPW inaccuracies are identified. And this is often no easy task, given the challenge in applying nuanced case law tests to potentially complex and evolving facts.

Indeed, in its March response to a House of Lords’ report on how the private sector OPW reforms were being implemented, the Government confirmed that HMRC’s compliance approach includes, for example, enquiry into dispute resolution processes, i.e. to examine whether the end client takes ‘reasonable care’ in arriving at status determinations.

Additionally, the Court of Appeal’s recent decision in Atholl House Productions Ltd made important points on how the case law tests that determine whether an underlying employment relationship exists should be applied. But the fact that this case has been remitted to the Upper (or possibly First-tier) Tribunal to be reconsidered in light of those points underlines just how difficult applying those tests can be in practice.

To help demonstrate that they are taking ‘reasonable care’ in their OPW compliance, organisations should ensure that the key principles from this decision are reflected in their approach to status determinations and resolving disputes with workers.

So how can organisations demonstrate ‘reasonable care’?

The ability to demonstrate that you take ‘reasonable care’ when discharging your OPW compliance obligations will minimise the risk of penalties being imposed in respect of any inaccuracies or errors that might, nevertheless, arise.

Questions to ask when assessing whether your organisation could satisfy HMRC that it takes ‘reasonable care’ include:

• How have our systems and processes worked over the first year of the new OPW regime? Determining OPW status can be complex – how can we use our experiences from 2021/22 to strengthen our systems and processes for the future? Should we consider an independent review to check that our procedures have taken root as expected and ensure we’re in line with best practice amongst our peers and competitors?
• Can we demonstrate that we respond to evolving case law and review existing determinations accordingly? Do we need to change how we do things given the recent Atholl House Productions Ltd decision? Are we in line with the Court of Appeal’s approach to the case law tests – for example, do we give appropriate weight to the specific written terms of our contracts? Do we appropriately consider relevant factors beyond mutuality of obligation and control in forming a view on the ‘business on own account test’?
• Have we identified all off-payroll workers amongst our suppliers? Are we comfortable we’re compliant where we engage contractors outside our usual labour procurement routes? How do we ensure that our oversight of this population remains current as more suppliers are engaged and other engagements evolve? What’s our position on outsourced services?
• Are our systems, processes, and documentation robust? Are we confident that we can demonstrate our status decisions are rigorous and considered on a case-by-case (or by role) basis? Can we prove to HMRC that how we use CEST or an alternative tool to reach a determination is appropriate in all cases?
• Are our policies understood internally and across the supply chain? Do our suppliers and colleagues understand our policies, processes, and procedures and what is expected of them?
• Are we training our people effectively? Are the people tasked with administering our systems and processes equipped with the knowledge and tools to ensure our business remains on top of its OPW obligations?
• Do we reflect how engagements work day-to-day in our determinations? Determinations must be based on high quality information and revised when the conduct of an engagement evolves – do our line managers have a clear line of sight to how engagements work in practice and know what to do if that changes?
• How do we manage our supply chain risk? Can we demonstrate that our due diligence processes, and those of our suppliers, ensure that tax obligations and workers’ rights are observed throughout the chain – particularly if our supply chain involves umbrella companies?
• Can we demonstrate that our dispute process is effective? Have contractors and fee-payers been given opportunities to ensure we’ve properly considered their representations? Do we have an objectively fair and compliant process to arrive at and communicate our decisions if appealed?
• Are we leveraging digital support effectively? If we’re not yet using technology, could this be an effective way to manage our OPW risk? Can we use a solution (e.g. KPMG’s OPW solutions) to identify affected workers, share information, produce status determinations and resolve disputes? Do our current systems capture and store relevant information for presentation to HMRC in the event of a review?

For further information please contact:

• Colin Ben-Nathan

• Anne-Marie Robinson