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Off-payroll labour – how to prove you take “reasonable care” over contractors

18 February 2021

Failing to deal with contractors correctly can expose your business to unexpected PAYE and NIC costs, interest and penalties. Our two tools can help you track and manage your off-payroll labour risk.

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With only a few weeks to go before the off-payroll labour rules apply to large and medium-sized private sector businesses, HMRC has published its policy statement on “compliance principles” for the new regime. This is important for businesses, because it sets out how HMRC will enforce the rules and what standards of compliance it expects when they engage contractors.

The 8 key principles that HMRC will follow are:

  • “we will support customers who are trying to do the right thing and comply with the rules
  • we will help customers meet their responsibilities under the off-payroll working rules
  • where customers make a mistake, we will help them correct it
  • we will check that mistakes are corrected
  • we will identify and correct non-compliance with the off-payroll working rules
  • we will challenge deliberately non-compliant customers
  • we will challenge tax avoidance schemes that claim to avoid the off-payroll working rules or otherwise reduce the tax payable
  • we will use a specialist team to carry out all our off-payroll working compliance activity.”

On the face of it, these seem perfectly sensible principles and what we would all expect from the tax authority. However, overall  they make it abundantly clear that HMRC expects businesses to make serious efforts to get things right, and will act if they don’t. As with most of the UK’s tax rules, HMRC can charge interest and penalties if the correct taxes are not paid on time. The off-payroll rules also have the nasty little surprise that failing to act correctly can make a business liable for PAYE and NIC that another business should have deducted!

Fortunately, the concept of taking ‘reasonable care’ can come to your aid with off-payroll labour compliance as it does with most other taxes. HMRC’s new policy statement specifically says that where it finds mistakes in a taxpayer’s handling of the off-payroll labour rules, it will not charge tax penalties where the business can demonstrate that it took ‘reasonable care’ in applying the rules.

How to demonstrate reasonable care for off-payroll labour

Our experience of a wide range of HMRC’s compliance enforcement activity illustrates that there are some fundamental steps businesses should take to prove they are taking reasonable care over off-payroll labour compliance.

Step 1 – Get expert help to assess your situation and risks

For off-payroll labour, this means analysing your business and records to establish how many contractors you use, what they do for you, how you engage them (what agencies you use and what the contract arrangements are), who in the business engages them, and how they are paid. The aim here is to assess what risks the new rules pose to your business, and what the costs of complying will be. Read about BDO’s Off-payroll risk manager tool.

Step 2 – Adapt your processes so it is easier for you to comply

You may need to centralise engagement of contractors and create new processes to ensure that all status determination assessments you carry out are accurate, timely and documented. Adopting new software like BDO’s Off-payroll tracker to manage the process is a good way to show you are taking your obligations seriously.

Step 3 – Communicate about your new processes, and train team members

Clearly, it is vital that the systems you put in place are followed, and that everyone in your business knows how contractors should be engaged. You will also need to communicate with your regular contractors to make sure they know how you will be operating in future.

Step 4 – Document everything!

If there is no evidence of what you have done, why should HMRC believe you have tried to get things right?

It can be helpful to show what expert advice you have taken on your compliance obligations, as well as keeping good records of all the steps you have taken, from board minutes, to staff memos and training logs. And, of course, you need to keep detailed records of every contract with a contractor, your status determination for that contract, and your communications with all relevant parties. BDO’s Off-payroll tracker allows you to record each contract and your decision (including the output from HMRC’s CEST tool) over whether PAYE and NIC should be deducted for that contract.

Don’t rely on light touch

As with new taxes introduced in recent years, HMRC has said it will take a light touch to its enforcement activity in the first 12 month. While it might not start dawn raids of non-compliant businesses until April 2022, this does not mean that businesses can ignore the off-payroll rules until then.

Businesses that don’t gear up now to manage their off-payroll labour will risk unexpected PAYE and NIC liabilities in future – although HMRC may not charge a penalty in the first year, it will still pursue the tax and NIC due, and charge interest where it is paid late. And you also run the risk of going onto HMRC’s compliance ‘high risk’ list for compliance with all other taxes – which could lead to expensive and time-consuming tax enquiries in the future.

If you would like help and advice on taking ‘reasonable care’ in engaging contractors, or any off-payroll issue, please get in touch with your usual BDO contact or Nick Duffin.