Off-payroll workers – HMRC’s focus on not for profit organisations
Off-payroll workers – HMRC’s focus on not for profit organisations
We have become aware that HMRC has been focusing compliance activity on not for profit organisations in relation to off-payroll workers. These reviews are, for the moment, focused on individual subcontractors and workers. Below is some guidance to support you if your charity receives a letter and is subject to a review.
I have been notified that HMRC are to carry out a compliance review – what next?
The first indication that your charity is to be reviewed will be an initial letter or alternatively a phone call followed by a letter. The letter from HMRC will include several questions in relation to off-payroll workers covering subcontractors, workers, and self-employed individuals. HMRC are testing whether you have a good understanding of how to determine employment status and whether you have processes and procedures in place to do so. Typically, you may be asked to turn around the information in a very short time frame (usually around 30 days). It is important that if you are not able to provide the information within that time limit you contact HMRC early to let them know the reasons for any delay and when you expect to be in a position to send a full response.
The likely areas that you will be asked to provide information for are;
- A list of all subcontractors, workers and individuals paid gross between 6th April 2022 and 5th April 2023, together with payment details for each, including services provided, dates of payment and amounts of each payment
- Sample of three invoices and three contracts
- A copy of your staff handbook or manuals
- Sample of three timesheets
- A description of the procedures you have in place for determining the employment status of contractors and/or workers
Given this current area of focus and the potential for increased costs (HMRC can go back up to 6 years) including penalties, now would be an ideal time to review your treatment of workers and contractors engaged on a self-employed basis.
Off-payroll working rules (OP21)
Whilst the compliance reviews are currently confined to employment status checks of individuals providing services to charities, it may well be that should errors be identified during the review it will be extended to off-payroll workers covered by OP21 legislation. In place since 6th April 2021, this affects all medium or large sized organisations who are responsible for deciding the employment status of their workers.
The OP21 rules may affect charities that engage workers through Personal Service Companies (PSCs) or potentially any other intermediary, such as a partnership or LLP. The rules ONLY apply if you meet 2 of the following 3 criteria:
- Your annual turnover exceeds £10.2m
- Your balance sheet total is more than £5.1m
- You had an average of 50 employees or more in your financial year.
It is important to note that when considering your level of turnover for the purposes of determining the size of your organisation, you exclude grant income and donations.
The OP21 rules do apply to my charity – what does this mean?
The rules require charities to assess if the intermediaries’ rules apply to the contracts it enters into with any PSCs that are hired directly or via third parties. At the outset, HMRC adopted a “soft touch” for such reviews, which meant that for the first year following the introduction of the rules, penalties would be charged in only limited circumstances. This soft touch approach has now ended, and we are increasingly seeing HMRC turn its focus onto organisations to test their compliance with the new rules and the pre-existing rules relating to the engagement of individuals on a self-employed basis.
Get your house in order and be prepared for review
Its evident that HMRC are ramping up their reviews in this area, with many not for profit organisations having already received letters and in the review process. Its therefore important that you are comfortable with your treatment of workers under the rules and have the relevant information available for a review.
However, determining employment status can be a difficult area underpinned by Case Law, leaving many organisations unsure of status in some circumstances. If you are in doubt, our experts have considerable experience assisting clients with of-payroll reviews. Get in touch with Caroline Jones, not for profit employment tax specialist, or your usual BDO adviser for help.