Is Off-Payroll Working working?
By the time you read this article, the April 2021 changes to the off-payroll working rules will have been around for eight months. That seems like plenty enough time to get to grips with the subject, especially for public bodies which were forced to adopt the earlier version of the rules from April 2017. But are public bodies now getting it right? Do they fully appreciate the nature of the task? Do their workflow processes capture all relevant engagements? In short, is off-payroll working actually working?
Prior to the introduction of off-payroll working (or ‘IR35’) to medium and large private sector businesses, there was relatively little negative publicity regarding the rules and the way that the public sector was coping with them. While HMRC’s Public Bodies Group will enquire about employment status and the use of intermediaries as part of their BRR+ activities, in our experience most public bodies have been largely left alone by HMRC’s specialist ‘Employment Status and Intermediary’ (ESI) compliance teams. However, there has been one spectacular exception to that position. Several Central Government departments have been exposed to the ESI teams and been found to have applied the off-payroll working rules incorrectly. One department, the DWP, was reported to have paid over £80m in tax/NIC arrears. Of some considerable concern is the fact that the department had, allegedly, completed the HMRC ‘Check Employment Status for Tax’ (CEST) online tool in reaching its incorrect conclusions over application of the rules.
The CEST advises users that HMRC will accept the outcome it provides as long as responses are accurate. The reality is that ‘accuracy’ in this context requires knowledge levels which are unrealistic across large numbers of hiring managers who are trying to get things done and preferably without the need to research a half century of employment status case law.
The recent introduction of a webchat function offering HMRC support for completion of the CEST appears to acknowledge how difficult the task can be. Our clients who have used it were asked to quote a NI number for the worker being assessed and, at the end of the generally helpful process, were told that the verbal advice could not be given in writing. These drawbacks may make the function less appealing for some to use, particularly those workers who deem their engagements to be outside IR35 and have concerns that their NI number might lead to routine HMRC checks.
The webchat function might also lead to a greater level of disagreements where a worker has used it to support their own case for being outside the scope of off-payroll working. In these circumstances, engagers need to be fully satisfied that the alleged verbal opinion provided is shown to be based on accurate and comprehensive information and supportable based on the CEST and accompanying evidence.
The potential workload for an organisation trying to comply with its off-payroll working obligations can be significant. A typical public body, such as a local authority, would need to involve several stakeholders. Knowledge would need to be held within Procurement teams, by HR personnel and payroll. Those working in Accounts Payable would ideally be ‘gatekeepers’ for the procedure. Then there’s a need for Legal to be aware, for difficult cases and disputes. Finally, there are potentially hundreds of budget holders/hiring managers who can engage an entity to provide a service. They need to have a general awareness, at the very least, to ensure that the rules are followed.
With such a huge resource requirement, does HMRC really believe that public bodies have committed sufficiently to comply with off-payroll working?
Even those bodies which have created and updated their policy/procedural documents are unlikely to have offered adequate training to their hiring managers. Many engagements involving intermediaries may have been identified and addressed properly but what about the unidentified engagements?
To add further complication, HMRC is now expecting the ‘end client’ to go to somewhat extreme lengths when dealing with supply chains involving agencies. In an October 2021 update, HMRC guidance warns that many umbrella companies are using ‘disguised remuneration’ to make their offering attractive to ‘workers’ using intermediaries. For example, they will claim that a worker can avoid tax on aspects of their pay, such as travel costs and other expenses, when this may not necessarily be the case.
The guidance goes on to recommend that end clients rewrite their contracts with agencies so that they have a right to check payslips and ensure that PAYE is being applied to the full amount earned. They also warn that many umbrella companies provide a UK ‘front’ for an overseas business and that where the ‘fee payer’ is based overseas, the tax/NI liabilities can pass up the chain to the end client. HMRC would like all engagers to have complete visibility over each engagement so that due diligence has been carried out on all entities in the supply chain.
The level of commitment recommended by HMRC guidance is, respectfully, way above that that can be realistically anticipated of public bodies. By adding to their burden, HMRC could be unwittingly encouraging poor behaviours, such as:
- Use of a blanket approach to determine whether workers are in or outside the scope of the rules.
- Routing all engagements through agencies and relying heavily on them for off-payroll working decisions.
- Leaving off-payroll working decisions to unsupported hiring managers where contracts are below set fee levels.
Based on our experience at PSTAX, many local authorities and NHS Trusts are struggling to keep their heads above water on this topic. These are the bodies that are taking their obligations seriously. There are others who are light years behind and have no idea of the size and extent of the tax/NI liabilities they are generating through their inactivity.
HMRC commissioned IFF Research to carry out a survey across public bodies. We first saw this well over a year ago so it is high time that HMRC published its findings.
In the meantime, the National Audit Office has recently announced its interest in off-payroll working. It is undergoing a review of how HMRC has implemented the rules. This promises to be an interesting exercise and the CIPP, which has been invited to participate, should be able to provide readers with appropriate feedback in due course. PSTAX will be involved too, and making the same observations as covered in this article.
Footnote: PSTAX has produced e-Learning modules to help public bodies understand off-payroll working. Please visit our eLearning page.