The Off-Payroll Working rules (‘OPW’ – commonly referred to as ‘IR35’) were first introduced for public bodies in April 2017 with significant changes to the relevant procedures added in April 2021. We continue to receive significant numbers of queries on this topic – and employment status generally – reflecting the fact that this subject continues to present many challenges for our clients.
The IR35 rules
By way of reminder, the IR35 rules require public sector bodies (and medium/large businesses) to follow specific procedures when engaging ‘workers’ providing personal service via an intermediary, such as a personal service company (PSC), or other intermediary, as defined by the legislation. The public body is required to assess whether, but for the presence of an intermediary in the contractual chain, the person providing the services would be regarded as an employee or office holder for tax and National Insurance Contributions (NIC) purposes. Where it is determined that the worker would be an employee or office holder the ‘fee payer’, ie the entity that pays the intermediary, must deduct and account for PAYE/NIC and Apprenticeship Levy.
If the public body paid the PSC directly, it is the public body’s responsibility to make the necessary deductions and pay these to HMRC accordingly. If the public body engaged with an agency that, in turn, engaged with the PSC then it is the agency’s responsibility to deduct and account for PAYE/NIC and Apprenticeship Levy (if applicable). It is important to note, for the avoidance of any doubt, that in all cases – whether an agency is involved or not – the public body is always required to make the necessary determination of whether the OPW rules apply.
The changes introduced in April 2021 require all end users (including public bodies) to issue a Status Determination Statement (‘SDS’) to PSCs that were deemed to be in scope. Additionally, end users are also required to set out the reasons for their determinations, maintain records of the advice given and advise PSCs of a right to disagree with any determinations given. Where a disagreement is raised, the end client (Public body as the engager) must respond within 45 days to avoid becoming liable for the PAYE/NIC due.
HMRC requires these very specific steps to be taken in all cases involving PSCs and failure to do so exposes the end client to potential arrears of PAYE, NIC, Apprenticeship Levy, interest and penalty charges if the rules are not properly followed and incorrect determinations are made.
Given that it is now over a year since the most recent changes to IR35 were introduced, and the end of the soft landing period, it will be interesting to see how HMRC deals with reviewing the levels of compliance in this area. In the past few months, HMRC has established a specialist Off-Payroll Working unit to deal specifically with IR35 compliance – working in tandem with the Employment Statement & Intermediaries section – which appears to be a statement of its intentions to ensure that organisations and businesses comply with the often onerous obligations included within the legislation. This is potentially part of a wider compliance effort from HMRC across all taxes over the next five years, as announced in the Chancellor’s March 2022 Spring Statement.
It has been widely reported over the past year that several Government departments have faced multi-million pound settlements with HMRC for failing to adopt the IR35 rules correctly. This has usually occurred because of a lack of understanding of the questions in the Check Employment Status for Tax (CEST) tool, strongly indicating that there are significant training requirements at hiring manager level within public bodies generally.
Therefore, it has probably never been more important for public bodies to make sure that they take all necessary steps in terms of updating their policies and procedures – as well as dealing with their training requirements – to help minimise the risks they face.
Take a look at our Off-Payroll Working e-learning course