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Considering your off-payroll working population (part 5)

Updated 15 December 2023

Read Purpose, scope and background (part 1) of these guidelines, if you have not already.

You should read these guidelines alongside existing off-payroll working guidance. They are not designed to be used in isolation, or to create an end-to-end process for organisations to comply with the rules.

Your organisation should apply the guidelines to reflect the complexity and scale of your own off-payroll working engagements. Use these guidelines to help make informed decisions, based on individual circumstances.

Reviewing your population

When your organisation is implementing the off-payroll working rules for the first time, you need to review all your existing workers. This is to make sure you identify any workers you already engage, who fall within scope of the rules.

This is also important when your organisation takes on new agencies or contracts which involve any element of labour supply, such as managed services.

You need to consider the rules for any worker that provides their services to you through their own intermediary, like a personal service company. These are often referred to as ‘off-payroll workers’.

Different parts of your organisation may need to work together to identify all the off-payroll workers within your organisation. This could include your HR, tax, procurement and accounts teams, and individual hiring managers. You may need to involve other teams, depending on how large and complex your organisation is.

There are 2 pools of workers for which you will need to apply the off-payroll working rules, although they may work alongside each other and alongside your organisation’s employees:

• directly engaged workers, whose personal service company or other intermediary are contracted and paid directly by you

• indirectly engaged workers, whose personal service company or other intermediary contract with third parties, such as a:

  • recruitment agency
  • consultancy
  • managed service provider

For more details on managed services, read contracted out services.

Directly engaged workers

You’ll need to apply the rules for any workers that provide their services through their own intermediary, directly to you as the client. You do not need to consider these categories of workers for the off-payroll working rules:

• workers that do not provide their services to you through their own intermediary (for example sole traders) — instead consider if they are employed or self-employed, as you always would with these types of workers
• your own employees, or employees seconded from third parties

Indirectly engaged workers

If you are the client, but not the deemed employer, you may not always be in direct receipt of the information a worker has to provide, like whether they are working through their own intermediary.

You need to carry out due diligence of your supply chain, so you can be sure that workers are within scope of the off-payroll working rules.

Ultimately it’s your responsibility to make sure you both:

• identify all off-payroll workers in your supply chain
• determine their employment status for tax purposes

You’ll need to communicate with all third parties that you contract with, like agencies and service providers. This is to make sure you identify all off-payroll workers you engage in longer, more complex, supply chains.

These third parties should be aware of the off-payroll working rules, and should understand the reason you’ve approached them.

As the client, you should ask third parties to either:

• provide details of all workers who provide their services to your organisation through their own intermediary — you’ll need to apply the off-payroll working rules to these workers
• confirm that no one is engaged through their own intermediary

If no one is engaged through their own intermediary, you will need to confirm that:

• workers are employed by a third party, like an agency, umbrella company or other supplier, and that PAYE is being operated on all income
• workers are providing their services as a sole trader

If a worker is contracted, treated and paid as an employee of an umbrella company, agency or other supplier, you have no client responsibilities regarding the off-payroll working rules. You do not need to operate them because the worker is already subject to PAYE. You should carry out checks to satisfy yourselves that PAYE has been operated.

If a worker is provided by an agency, or third party, where there are other parties in the labour supply chain, you should carry out checks with the party that you contract with to satisfy yourself that PAYE has been operated further down the chain.

For example, where an agency provides workers to you that are employed through an umbrella company, as a minimum you should verify with the agency supplying the worker that the umbrella company is engaging the worker as an employee.

If the worker is providing their services through their own intermediary, and is not employed by the umbrella company, this is within scope of the off-payroll working rules, and you are responsible for applying the rules.

Due diligence

It’s important for you to understand that you may be responsible for any resulting liabilities where mistakes are made.

You should perform sufficient due diligence on your labour supply chain. You need to make sure that you have accurate and robust information about all off-payroll workers you engage, whether directly or indirectly.

If HMRC cannot recover any PAYE liability from other parties in the labour supply chain within a reasonable period of time, we may attempt to recover the liability directly from your organisation. Carrying out robust checks on the credibility and legitimacy of your labour supply chain can help prevent this from happening.

Read more information about:

• HMRC’s powers of recovery in HMRC internal manual ESM10031
• securing the labour supply chain in HMRC internal manual ESM10032

Groups and large organisations

If you are a larger organisation with a group structure, you’ll need to consider how your group administers the off-payroll working rules.

You may have a centralised function, or you may have individual functions and processes across your group. You’ll need to ensure that your processes for identifying off-payroll workers are robust, and that you consult the correct people.

If your organisation acquires a small business, you’ll need to consider their off-payroll working population and integrate your existing off-payroll working systems and processes. The small company will be considered as part the larger group for the off-payroll working rules, from the start of the next tax year after the acquisition.

Office holders

An office is a post that a person can be appointed to, which they can vacate and to which a successor can be appointed. Office holders are always subject to PAYE on income from their office, even if they are engaged through their own intermediary.

It’s important to include office holders, including any of your company directors or those fulfilling statutory roles for you, when considering your off-payroll working population.

Read more about the employment status of office holders.

Managed services

Many organisations contract with service providers who provide ‘managed services’.

It’s important you understand whether your organisation or the service provider is the client, for the purposes of the off-payroll working rules.

Read more about contracted out services.

Record keeping

You should keep robust records of the steps you have taken to identify your off-payroll worker population. This should include responses from third parties for indirectly engaged workers, and from managed service providers.

Where you’re satisfied that you do not have any off-payroll workers subject to the rules (for example, if all your workers are already subject to PAYE by umbrella companies), you should keep records to show:

• how you came to this conclusion
• the due diligence you have taken

Read more about record keeping.

Population and contract reviews

If your organisation has a significant number of off-payroll workers, you should review your off-payroll working arrangements regularly.

As part of these reviews, you might choose to undertake regular reviews of the whole, or a sample, of your worker population.

We recommend that these reviews include seeking further assurances that PAYE is being correctly operated on umbrella company workers.

You could do this by providing umbrella companies with a list of workers they supply to your organisation, and asking them to confirm that PAYE has been operated on these workers’ income.

Read more about internal audit processes.

Example 1 — large business

This is an example of a large-sized organisation effectively identifying its off-payroll workers to prepare for the off-payroll working rules coming into effect in April 2021, and of maintaining effective records.

While this is a historic example of a large business, it contains useful good practice for:

• clients who have to operate the off-payroll working rules for the first time
• large businesses to reflect on their current arrangements

You should adapt your systems and processes to reflect the scale of your off-payroll arrangements.

An organisation kept records of all its workers on an existing computer system. This included all employees, other workers and managed service workers. This system was in place to manage security clearances, computer access, and control of security passes.

They logged all temporary workers on the system as part of the procurement process. They identified these workers as either ‘contractor’, ‘agency’ or ‘managed services’.

First, the organisation identified its directly engaged, off-payroll workers.

They ran a report on the system to generate a list of workers labelled ‘contractor’, to capture all directly engaged workers as of March 2021. They also ran reports on ‘agency’ and ‘employee’.

They asked hiring managers across the organisation to check their records, to both:

• generate a list of all off-payroll workers within their business area
• confirm if these workers are directly or indirectly engaged

The organisation compared workers recorded as directly engaged against the ‘contractor’ report, to create a list of directly engaged, off-payroll workers.

The procurement and accounting teams made checks to identify self-employed workers. They removed these workers from the list, because they did not work through their own intermediary.

This left workers who were, or the organisation believed were, providing their services through their own intermediary.

Where necessary, Human Resources (HR) made further checks, like contacting the individuals to confirm their working arrangements. This narrowed the list to just those workers who were working through their own intermediary and were engaged directly.

After this, the organisation identified its indirectly engaged off-payroll workers. The organisation wrote to all the agencies they contract with, to identify all indirectly engaged workers providing their services through their own intermediary.

Some agencies provided declarations that all their workers were subject to PAYE through umbrella companies, supported by confirmation that PAYE has been deducted for a sample of workers. Others provided details of workers who worked through their own intermediary. The organisation added these to the list of off-payroll workers.

The organisation then checked the ‘agency’ report against the list of indirectly engaged off-payroll workers gathered by the hiring managers, to make sure they had correctly recorded all workers provided through agencies. They checked the ‘employee’ report against PAYE records, to make sure that all individuals considered staff were on the payroll.

The organisation considered all their managed services to determine whether they (the organisation) were the client, for purposes of the off-payroll working rules. In some cases, they concluded that the services were not fully contracted out, and that they were the client.

They contacted the service providers, and asked them to confirm how their workers were engaged. Most providers advised that all their workers involved in delivering the service were employees of the service providers.

Where the service providers were not fully contracted out, and used individuals that worked through their own intermediaries, they provided worker details to the client. The organisation added these to their list of off-payroll workers.

The organisation updated its procurement processes to include a new procedure. When any new off-payroll workers were engaged, the hiring manager notified the HR team responsible for maintaining the list of off-payroll workers. This list is now a database which contains:

• full worker details
• the date and outcome of their deemed employment status decision
• the hiring manager’s name
• contract start and end dates
• decision review dates
• whether the worker provides their services directly or indirectly
• if applicable, the name of the agency who supplied them

The organisation has updated its payment systems and processes to make sure that any records created for suppliers of services of labour must confirm that the off-payroll working rules have been considered.

This field in the payment system is set to ‘No’ by default and must be amended to ‘OPW-PAYE/OPW-Gross payment/NA-No personnel/NA Self-employed’. As a failsafe to maintain the population of directly engaged off-payroll workers, the system stops payments being issued where the flag is set to ‘No’, and notifies HR. This prompts them to:

• investigate and update the field
• add any workers identified this way to the list of off-payroll workers

To check the list accurately reflects the population of off-payroll workers who provide their services indirectly, each quarter, the organisation selects a sample of agencies. They ask them to confirm which of the workers they supply, if any, are within scope of the off-payroll working rules because they work through their own intermediary.

To further assure their labour supply chain, where agencies reply that their workers are all treated as employees of an umbrella company, the organisation asks them to provide confirmation that the appropriate PAYE deductions have been made for a sample of workers.

If the organisation does not get suitable assurances that the correct deductions are being made, they ask relevant workers to provide a copy of a recent payslip from the umbrella company. The workers do not have to reply, but are aware that these checks will help to protect their employment rights, as it is referenced in their welcome email.

HMRC opened an enquiry to review the off-payroll working arrangements of the organisation. We were satisfied that the organisation has developed robust procedures to identify their population of off-payroll workers correctly, reducing the risk of making errors.

Example 2 — medium sized organisation

An example of a medium-sized organisation effectively checking its labour supply chains to ensure none of the workers supplied are within scope of the off-payroll working rules, after deciding not to engage any off-payroll workers.

A medium-sized organisation made a policy decision not to engage any off-payroll workers. They discussed this individually with each of their directly engaged, off-payroll workers in the months before April 2021, and agreed to either:

• make them a permanent employee
• offer them a fixed term (temporary) employee contract
• allow the worker to continue to provide their services, but through an approved umbrella company, as an individual subject to PAYE

The HR director was responsible for oversight of all parts of the off-payroll working process. The tax manager and financial director worked together to perform extensive due diligence on suitable umbrella companies and created an approved list of 3.

Procurement, HR and the payment teams updated their processes to reflect that arrangements or changes involving unapproved umbrella companies would not be authorised.

The organisation updated its agreements with agencies. This reflected the requirement to ensure and provide assurances that any umbrella workers were paid only by a company on the list. They scheduled periodic reviews with agencies and umbrella companies to assure the integrity of the labour supply chain.

The organisation found that some of their managed services were not fully contracted out for the purposes of the off-payroll working rules. This meant that the organisation would have client responsibilities for any off-payroll workers involved in providing these services.

The service providers confirmed in writing that none of the workers they supplied worked through their own intermediaries. All workers were either employees of the service provider, or were treated as employees of umbrella companies and subject to PAYE.

The organisation scheduled periodic reviews with managed service providers. They also updated their procurement processes for any new or renewed contracts for managed services. This ensured that any off-payroll workers in services that were not fully contracted out would be identified.

The organisation asked their tax agents to review their approach. The agents provided a report which gave the organisation assurance that their processes were robust and, if adhered to, would continue to ensure the organisation remained compliant with the off-payroll working rules.

Example 3 — medium sized organisation

The same medium-sized organisation from the previous example changes its decision not to engage off-payroll workers.

The organisation reviews how it engages temporary workers. They find that their decision not to engage workers in scope of the off-payroll working rules is making it difficult to find and keep suitable workers. They make a management decision, to allow these workers from the start of the next tax year.

The organisation identifies the individuals in the business who use agency workers, and provides them with training on how to operate the off-payroll working rules. Overall responsibility for compliance with the rules sits with the tax manager.

The organisation introduces systems and processes to make sure that the off-payroll working rules are considered, whenever a worker in scope of the rules is identified. They inform the agencies they use that they’ll:

• accept these workers going forward
• always send a status determination statement to them, confirming the worker’s tax treatment

They update their contracts with the agencies to reflect this change.

They will continue to review each worker’s employment status for tax on an annual basis, as they had decided they would not engage large numbers of workers in scope of the off-payroll working rules. The organisation retains elements of their existing checking process, to make sure they identify any missed off-payroll workers.

The organisation asks their tax agents to review their revised approach. The agents provide a report which gives the organisation assurance that their processes are robust and, if they adhere to them, will continue to ensure the organisation remains compliant with the off-payroll working rules.

The next section of the guidelines is What to do if off-payroll workers are missed (part 6).