01 December 2021
Duncan Groves, director and head of employment taxes at PSTAX considers how successfully the off-payroll working rules have been implemented, whilst looking to the future and research carried out by Her Majesty’s Revenue and Customs (HMRC)
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 more than enough time to get to grips with the subject, especially for public bodies, which were required 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?
The check employment status for tax (CEST) tool
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 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 its business risk review 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 incorrectly applied the off-payroll working rules. One department – the Department for Work and Pensions – is reported to have paid over £80 million in tax and National Insurance contribution (NIC) arrears. Of some considerable concern is the fact that the department had stated it completed the HMRC CEST online tool in reaching its incorrect conclusions over application of the rules.
The CEST tool advises users that HMRC will accept the outcome it provides if responses are accurate. The reality is that accuracy in this context requires knowledge levels which could be deemed as unrealistic across large numbers of hiring managers who are trying to get things done, without the capacity to carry out extensive research on employment status case law.
The recent introduction of a webchat function offering HMRC support for completion of the CEST tool appears to acknowledge how difficult the task can be. Clients who have used it were asked to quote a NI number for the worker being assessed and, at the end of the process, were advised 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 are concerned 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 satisfied that the verbal opinion provided is based on accurate and comprehensive information and supportable based on the CEST tool and accompanying evidence.
The responsibility does not just fall to payroll
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 human resource personnel and payroll. Those working in accounts payable would ideally be gatekeepers for the procedure. Then there’s a need for legal teams to be aware for difficult cases and disputes. Finally, there are potentially hundreds of budget holders and 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 and procedural documents are unlikely to have offered adequate training to hiring managers. Many engagements involving intermediaries may have been identified and addressed properly, but what about unidentified engagements?
A common misunderstanding is that, due to its name, the responsibility for off-payroll working falls solely to the payroll department. Knowledge of the rules needs to be shared far more widely to ensure compliance.
The complexities of guidance
To add further complication, HMRC is now expecting the end client to take extra precautions when dealing with supply chains involving agencies. In an October 2021 update, HMRC guidance warned 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 can be located here: http://ow.ly/U17S30s0Mq4.
The guidance goes on to recommend that end clients rewrite their contracts with agencies so they have a right to check payslips and ensure that pay as you earn 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, that tax and 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 could unwittingly lead to 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 experiences at PSTAX, many local authorities and National Health Service 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 and 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 we anticipate that HMRC will publish its findings soon.
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, will provide readers with appropriate feedback in due course. PSTAX will be involved too, and making the same observations as covered in this article.
PSTAX has produced e-learning modules to help public bodies understand off-payroll working. Please visit https://hubs.ly/H0_pg0t0 for more details.
Featured in the December 2021 / January 2022 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.