Published by: Jacqui Roberts, Associate Director - Employment Tax
Navigating the complex rules of employment status; the historic off-payroll labour rules for public bodies and now the new rules from April 2021 can be difficult. Notably a number of public bodies have had to make settlements of significant amounts of PAYE and NIC, interest and penalties with HMRC.
In the public sector, the off-payroll rules have been in force since April 2017, however, the rules introduced to the private sector from April 2021 now apply to public bodies, resulted in several changes to the 2017 rules.
As a recap, all public bodies are required to identify workers providing personal service either directly or indirectly via a “personal services intermediary” (known as a PSC and which is usually their own limited company) and carry out an employment status assessment. Where there is a PSC in the labour supply chain, the conclusion of that assessment - known as a Status Determination Statement (SDS), must then be passed to the worker and the next entity in the chain if it is not the PSC.
If the assessment concludes that the worker’s services constitute deemed employment, the public body is required to deduct PAYE and NIC and account for Employers’ NIC and Apprenticeship Levy. If the public body indirectly engages a worker via PSC and another intermediary e.g. an agency, the employment status assessment remains the obligation of the public body. In addition, the obligation to deduct PAYE and NIC remains with the public body until it has passed on a conclusion of the assessment and explanation of why that decision has been reached (known as the Status Determination Statement or SDS) to the agency and the worker. This is the point at which the payroll withholding responsibility moves to the party in receipt of the SDS usually an intermediary directly above the PSC in the labour supply chain (typically an agency). In view of this and the risks of getting it wrong, it is vital that public bodies understand all of their new obligations.
The risks of operating the off-payroll rules are multiplied where the public body has a number of business area managers involved in the engagement process or there isn’t a central function responsible for the process. Here are some of the key areas public bodies need to be aware of in order to ensure robust off payroll worker compliance.
Key themes identified during public sector off-payroll reviews
Employment status assessments can be a difficult area for public bodies to deal with. With this is mind the majority of public bodies are using HMRC’s CEST tool to help in determining status. We have seen many instances where the seemingly straight forward questions are not answered in the way HMRC would expect.
One example of this is the misinterpretation of the CEST question relating to vehicles. The question “Will the worker have to fund any vehicle costs before your organisation pays them?” only applies and requires a “Yes” answer where the individual must provide a vehicle for use in the course of their work. It does not apply for travelling from home to the workplace and vice-versa and also should not include reimbursements of fuel for this travel. There are many similar examples where the answer required is not as straight forward as the questions suggest.
When the public body rules were introduced, many public bodies revisited contracts to ensure they were robust, including providing a substitution clause. In itself this is fine if the contractual position reflected what happened in practice. However, unfortunately sometimes it was incorrectly assumed that the contractual position takes precedence - and this led to CEST questions being answered incorrectly. HMRC will initially consider contractual arrangements but will then check whether they accord with practical arrangements: it is the practical arrangements that count for the CEST questions.
2. Use of Statement of works
Where a public body enters into a fully contracted-out service it does not need to apply the off-payroll rules to the engagement. Again, given the risk of getting this wrong, it is important to determine whether the service being provided is truly a contracted-out service.
We have seen some examples of personal service of workers being treated as out-sourced services on the strength of a statement of works (SOW). The reality of the arrangements should be carefully examined to ensure that the contract is not incorrectly treated as an out-sourced service (unlikely where the public body engages the PSC directly) when it is clearly a personal service provided by the worker. In many cases, out-sourced service is only likely where the services are provided indirectly via third party supplier (although third party suppliers may also be within the off-payroll rules).
Some of the factors that need to be examined to establish whether a service is outsourced or not include:
- Who owns the delivery of the service - the supplier or the worker/workers?
- Who is the worker’s client?
- Is there any control, supervision of the worker; is that exercised by the supplier or the public body?
- Who is responsible for the delivery of the service?
- Who bears the financial risk, the worker or the supplier?
- Does the supplier’s service look like several linked procurements of the workers’ services
3. Use of Umbrella solutions
Many public bodies have reduced their reliance on workers via PSCs and have alternatively used umbrella companies to supply workers. Where a bone fide umbrella company employs the workers and deducts and remits the correct PAYE and NIC to HMRC this shouldn’t be an issue. However, a public body needs to ensure robust due diligence processes are in place to confirm this.
Recent press reports, as well as HMRC’s employer bulletins and alerts on mini umbrella structures, have brought into sharp focus the level of complexity there is in mitigating labour supply chain risk in outsourced arrangements and the risk of reputational damage to the parties involved. Removing direct oversight of arrangements could potentially increase the risk as visibility reduces. Sometimes examining the risks from labour supply chains can be missed as historically public bodies may have left the responsibility to the procurement department. However, HMRC expects public bodies to have full visibility of their labour supply chains and to have implemented policies to ensure that both public body and supplier are compliant.
4. Demonstrating reasonable care
HMRC expect public bodies to prove they have taken reasonable care in their approach to off-payroll labour. This includes in the CEST assessments and, importantly, the approach to overall governance. HMRC have made it clear that reasonable care means:
- Having a robust off-payroll labour policy in place and in use – this means setting out who owns the policy (and keeping it up to date with periodic reviews) and each department’s role within the policy and procedures which could be human resources, procurement, payroll and tax
- Completing the CEST tool questions accurately with due regard for, and application of, HMRC’s wider guidance on determining status
- Keeping accurate records of off-payroll workers engaged, status conclusions reached and preserving sufficient records to show the reasons for reaching status conclusions
- Ensuring that people involved in the determination process are knowledgeable and have a good understanding of the work they are undertaking with adequate training and support
- Seeking qualified professional advice where required
- Reviewing individual determinations periodically to ensure they remain valid
- Evaluating status determination processes periodically (and updating if necessary) to ensure they remain fit for purpose
- Having processes in place to spot where there are changes to worker T&Cs and/or working practices and ensure a re-assessment of status is undertaken where this happens
- Giving consideration to the specific facts of every case – not making blanket determinations where there could be variations in working practices or contractual T&Cs
- Understanding and fully evaluating all personal service in the supply chain and undertaking robust due diligence. This includes clear processes being implemented to consider engagement by business departments, human resources and procurement.
How BDO can help
Our employment tax team has off-payroll specialists that can support you on any off-payroll or wider employment tax issue and understand the pressures and issues that public sector bodies face. BDO has a wide range of practical and operational experience that can support public bodies in designing, reviewing, maintaining and training staff in robust end to end processes supported by the appropriate governance policy documents. We can also support public bodies with any approach to or from HMRC in respect of historic positions. Find out about our Off-payroll Labour services.
If you wish to discuss further, please contact:
Caroline Jones, Employment Tax Director, Mobile - 07866 178226 or Jacqui Roberts, Employment Tax Associate Director, Mobile - 07989 356240.