However, this ‘light touch� approach to penalties ended on 6 April 2022.
Where OPW errors arise on or after that date due to the end client or fee payer failing to take ‘reasonable care�, HMRC could charge penalties of up to 30 percent of the tax and social security at stake, with penalties of up to 100 percent for deliberate non-compliance or potentially more if there is an offshore connection.
So what should organisations now be thinking about?
Applying the OPW rules can be complex. For example, in February 2022 aÌýÌýnoted that, for 2020/21 alone, Government departments and agencies disclosed a total of £263 million paid, owed, or thought to be due in relation to failure to operate the public sector OPW rules with ‘reasonable careâ€�. This included lack of reasonable care when preparing status assessments using HMRC’s Check Employment Status for Tax (CEST) tool, i.e., failing to interpret the questions in line with HMRC’s guidance and/or ensuring the responses were, and remained, accurate (in its recent reportÌýLessons from implementing IR35 reforms, theÌýthat public sector non-compliance might be much more widespread than even this figure suggests).
Accordingly, going forward we similarly expect HMRC’s compliance approach to focus, in particular, on whether organisations have taken ‘reasonable care� where OPW inaccuracies are identified. And this is often no easy task, given the challenge in applying nuanced case law tests to potentially complex and evolving facts.
Indeed, inÌýits March responseÌýto a House of Lordsâ€� report on how the private sector OPW reforms were being implemented, the Government confirmed that HMRC’s compliance approach includes, for example, enquiry into dispute resolution processes, i.e. to examine whether the end client takes ‘reasonable careâ€� in arriving at status determinations.
Additionally,Ìýthe Court of Appeal’s recent decisionÌýinÌýAtholl House Productions LtdÌýmade important points on how the case law tests that determine whether an underlying employment relationship exists should be applied. But the fact that this case has been remitted to the Upper (or possibly First-tier) Tribunal to be reconsidered in light of those points underlines just how difficult applying those tests can be in practice.
To help demonstrate that they are taking ‘reasonable care� in their OPW compliance, organisations should ensure that the key principles from this decision are reflected in their approach to status determinations and resolving disputes with workers.
So how can organisationsÌýdemonstrate ‘reasonable careâ€�?
The ability to demonstrate that you take ‘reasonable care� when discharging your OPW compliance obligations will minimise the risk of penalties being imposed in respect of any inaccuracies or errors that might, nevertheless, arise.
Questions to ask when assessing whether your organisation could satisfy HMRC that it takes ‘reasonable care� include:
- How have our systems and processes worked over the first year of the new OPW regime?ÌýDetermining OPW status can be complex â€� how can we use our experiences from 2021/22 to strengthen our systems and processes for the future? Should we consider an independent review to check that our procedures have taken root as expected and ensure we’re in line with best practice amongst our peers and competitors?
- Can we demonstrate that we respond to evolving case law and review existing determinations accordingly?ÌýDo we need to change how we do things given theÌýrecentÌýAtholl House Productions LtdÌýdecision? Are we in line with the Court of Appeal’s approach to the case law tests â€� for example, do we give appropriate weight to the specific written terms of our contracts? Do we appropriately consider relevant factors beyond mutuality of obligation and control in forming a view on the ‘business on own account testâ€�?
- Have we identified all off-payroll workers amongst our suppliers?ÌýAre we comfortable we’re compliant where we engage contractors outside our usual labour procurement routes? How do we ensure that our oversight of this population remains current as more suppliers are engaged and other engagements evolve? What’s our position on outsourced services?
- Are our systems, processes, and documentation robust?ÌýAre we confident that we can demonstrate our status decisions are rigorous and considered on a case-by-case (or by role) basis? Can we prove to HMRC that how we use CEST or an alternative tool to reach a determination is appropriate in all cases?
- Are our policies understood internally and across the supply chain?ÌýDo ourÌýsuppliers and colleagues understand our policies, processes, and procedures and what is expected of them?
- Are we training our people effectively?ÌýAre the people tasked with administering our systems and processesÌýequipped with the knowledge and toolsÌýto ensure our business remains on top of its OPW obligations?
- Do we reflect how engagements work day-to-day in our determinations?ÌýDeterminations must be based on high quality information and revised when the conduct of an engagement evolves â€� do our line managers have a clear line of sight to how engagements work in practice and know what to do if that changes?
- How do we manage our supply chain risk?ÌýCan we demonstrate thatÌýour due diligence processes, and those of our suppliers, ensure that tax obligations and workersâ€� rights are observed throughout the chain â€� particularly if our supply chain involves umbrella companies?
- Can we demonstrate that our dispute process is effective?ÌýHave contractors and fee-payers been given opportunities to ensure we’ve properly considered their representations? Do we have an objectively fair and compliant process to arrive at and communicate our decisions if appealed?
- Are we leveraging digital support effectively?ÌýIf we’re not yet using technology, could this be an effective way to manage our OPW risk? Can we use a solution (e.g. ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø’sÌýOPW solutions) to identify affected workers, share information, produce status determinations and resolve disputes?ÌýDo our current systems capture and store relevant information forÌýpresentation to HMRC in the event of a review?
