HMRC’s new Off-Payroll Check letters: explainer

About 12 months ago, I saw my first Off-Payroll Working Rules “Check” letter from HMRC.

You might think that puts me ahead of the curve, but I’ve since seen no less than seven such letters -- and our agency went on to assist several organisations which received the letters from HMRC directly, in the first place, writes Matt Collingwood, managing director of VIQU.

What does an OPW check letter from HMRC contain?

They contain up to 13 questions and unfortunately for the recipient, they are posed in quite an admin-heavy, multi-faceted way. I’m going to share some of the questions, here, exclusively with ContractorUK.

Let me acknowledge at the outset, before I get into the detail, that I am not a tax specialist.

Indeed, after helping clients with the specific task of assisting them in auditing their contingent labour arrangements, my recommendation to affected organisations is to share their OPW check letter from HMRC with a tax or employment law specialist.

Don’t know, don’t think…

Not being an IR35 specialist doesn’t stop me from observing that most end-users don’t know what to expect when the OPW check letter arrives.

And this may not surprise contractors, but most end-users often don’t think of preparing for an OPW check until they are presented with one from HMRC.

Up to six pages, with HMRC saying, in effect, ‘consider your internal IR35 processes to manage limited company contractors in the spotlight,’ therefore can come as quite a shock.

Revealed: The questions HMRC asks in an OPW check letter

Here’s the first question in HMRC’s OPW check letter:

As you can see, it’s less of a query and more of an information request:

• Provide details of the systems and processes you have in place to determine if the off-payroll working rules apply when you engage workers who provide their services via their own PSCs or other intermediaries. Explain any additional or different steps taken when engaging workers supplied via an agency or other labour provider.

The next question also has two-parts, and it isn’t much lighter in the administrative detail it seeks to unearth.

Question two of the OPW check letter states:

• How do your processes ensure compliance across your organisation? Please demonstrate how you ensure consistency when decision-making is not a centralised function.

There are some ‘cause and effect’ questions too.

HMRC states:

• As a result of the OPW rules, how many workers who previously worked through their own PSCs have been moved to employment by an umbrella company?

 

• As a result of the OPW rules, how many workers who previously worked through their own PSCs have been moved to employment within your organisation?

 

Given that HMRC semi-recently updated its contracted-out guidance (November 30th 2023), it’s perhaps little wonder that the OPW check later also asks:

• Provide details of your outsourced services that you believe are fully contracted out and therefore exempt from client responsibilities under the off-payroll working rules.

 

• Please provide details of the process you use to determine that a service is fully contracted out.

Towards the second-half of the OPW check letter, maybe a bit of vanity from HMRC creeps in!

The tax authority states:

• Confirm if you use HMRC’s Check Employment Status for Tax (CEST) tool, or provide details if you use another equivalent tool.

Due to confidentiality reasons, I cannot disclose the identities of the organisations which we know to have received these off-payroll audits by HMRC.

But some are recognisable household names.

And in all cases, we believe that compliance issues were identified by HMRC.

At the time of writing, we are waiting to hear from the end-users in terms of HMRC’s next steps.

But already, the OPW checks appear to have uncovered three main failings in terms of OPW compliance.

1. The Status Determination Statement simply hadn’t been completed

In some cases where PSCs had been engaged, those engagements were signed off by line managers, but there was little to no consideration of the OPW rules. As a result, the client had to disclose to HMRC where Status Determination Statements had simply not been completed.

2. Many Status Determination Statements were wrong or out of date

In some instances, PSCs were on-site for 18 months and such contractors handled a range of tasks, often agreeing to do whatever the client requested, regardless of what their contract specified.

Some PSCs signed numerous extensions without any new SDS being issued.

Furthermore, we estimate only about 20% of the terms we saw PSCs engaged on outlined “deliverables.”

Job titles for outside IR35 contractors were commonplace.

Also in the vast majority of instances, managers we spoke to confessed that the SDS no longer reflected the true way in which the PSC was engaged, or now operated day-to-day.

In a potential knee-jerk to the SDS not keeping up with the reality, more often than not, the contractor was switched from outside IR35 to inside IR35.

3. Right of Substitution; what right of substitution?

In eight instances of OPW checks at eight separate organisations, not a single substitution was offered or used.

When we informally asked, clients freely disclosed they would most likely reject any substitute, saying only “the person they interviewed” was expected to carry out the work.

Many contractual terms gave clients the power to veto a substitute and named the individual performing the work.

Not great news is it? And that's before Autumn Budget 2024!

We are acutely aware that these perceived instances of IR35 non-compliance, specifically with the OPW rules, isn’t what many contractors want to hear.

Our takeaway from all of the organisations which were subjected to an OPW check and which had perceived instances of non-compliance, is that the use of PSC workers is now being discussed at these organisations, at the highest level.

OPW failings: How end-clients are responding -- and how PSCs might respond

Apparent failings of managers to follow processes, and in some cases, the perceived failure to implement OPW/IR35 processes, mean that some C-suite decision-makers are now questioning their continued usage of PSC workers.

Last week to end-users, I asked online:

“If you were to receive such a letter, would you be confident that your processes and determinations could withstand HMRC's scrutiny?” Well, if I were a PSC contractor, I’d want to know that the answer would be a resounding “yes” to that question. If not, I might be asking some questions of my own and vote with my feet if the answers come up short.