Promotional material

Operating PAYE (part 11)

Updated 15 December 2023

© Crown copyright 2023

This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

This publication is available at https://www.gov.uk/government/publications/help-to-comply-with-the-reformed-off-payroll-working-rules-ir35-gfc4/operating-paye-part-11

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.

Give feedback on these guidelines using the survey we’ve created.

All deemed employers, whether they are also the client for the purpose of the rules, or a fee-payer in the supply chain, should have robust systems and processes in place, to make sure that PAYE is operated in accordance with the off-payroll working rules. The size and complexity of your organisation’s structure, along with the status determination decision making process, should determine how you design these.

You can include deemed employees in your organisation’s main payroll, or set up a separate payroll scheme. Whatever you decide to do, the requirements to comply with the rules are the same.

Your relevant staff or stakeholders involved in the PAYE process should have sufficient knowledge, and understand what is required of them.

Your process should have clear steps and guidance on how to calculate the chain payment, and the deemed direct payment, that will be used for PAYE purposes.

Read more information about how to calculate the payments, in:

You need to follow the guidance for deemed employer responsibilities, when you report payments to HMRC.

You need to make sure you use the off-payroll working Real Time Information (RTI) indicator, which is shown as the ‘off-payroll worker subject to the rules’ indicator in the RTI system. The name of this indicator may be different in your payroll software — you should make sure this is clearly set out in your process, and any supporting guidance.

Deemed employer is the client

When you decide that an engagement is inside the off-payroll working rules (the worker is a deemed employee), you should have an end-to-end process for your staff operating PAYE. This will reduce your risk of errors when operating the rules. Your process should include:

  • how the chain and deemed direct payments should be calculated and by who, including consideration of VAT and expenses and benefits
  • how the relevant information flows through to the payroll department — this should include the relevant information to allow any benefits to be reported for National Insurance purposes.
  • the steps the payroll department should take to operate PAYE correctly, including the requirement to use the RTI indicator
  • any further steps the payroll department should take once PAYE has been successfully operated, for instance confirmation that payment has been included in the RTI reports to HMRC (the specific process you use to record this will be your decision, but should form part of the end-to-end process)
  • points of contact for others in the process to use, if they face any difficulties during any of the steps in the process

  • set out where all the relevant information should be stored — this will:

    • help with any end-to-end audit checks of your PAYE process
    • reduce risks of payments being missed

You should record information from all these processes. Read more information about all the records you should keep.

This also applies if you outsource your payroll responsibilities to a third party. You should discuss and agree with them the process that you’ll both follow. If you outsource your payroll responsibilities, your still have obligations for operating PAYE, and complying with the off-payroll working rules.

Read more information about outsourcing your off-payroll working responsibilities to a third party.

You should undertake periodic reviews, to check for any gaps or improvements to your payroll process. If you identify improvements, you should communicate these to relevant individuals in your organisation, and upskill staff directly impacted, as required.

The client is not the deemed employer

If you are the client, but not the deemed employer, then you should have a process to make sure the deemed employer is able to meet its PAYE obligations. Your process should clearly set out the steps you need to take, to provide the correct information to the deemed employer.

This information should always include:

  • the status determination statement
  • information that you may hold which will allow the deemed employer to calculate the chain and deemed direct payment — for example, details of expenses you have reimbursed

Read more information about calculating the chain and deemed direct payments in HMRC internal manual ESM10029.

If you contract with more than one deemed employer, you should work with each to agree how you will communicate the information it needs to operate PAYE effectively. Your process should reflect what you have agreed with each deemed employer.

You should request confirmation that PAYE has been operated, when the off-payroll working rules apply, from the deemed employers. This lowers the risk of non-compliance further down the supply chain. Agree the expectations you have of the deemed employer in advance. This will help make sure that the relevant status determinations are acted upon.

Carrying out these checks will help to reduce your exposure to liability, in cases that fall under the recovery from other persons’ provisions.

Read more information in:

You should make the deemed employer aware of relevant, named contacts in your organisation, in case any issues arise.

Deemed employer — contracts directly with the client

When you are the deemed employer but not the client, you need to have a clearly set out process, and robust systems in place, to make sure you are:

  • operating PAYE correctly
  • meeting the requirements set out in the off-payroll working rules

You should agree the process, with all the clients you contract with, for getting:

  • the status determinations statements
  • any other information you may need to identify the chain payment, and the deemed direct payments

If there are multiple clients providing you with status determination statements, you should agree the best system for you. This lowers your risk of status determinations being missed, and PAYE not being operated.

You might also receive status determination statements for workers that have resulted in the off-payroll working rules not applying. Your systems and processes need to identify these cases, which do not require PAYE to be operated.

You should set out the contact points within your own organisation, as well as the client’s organisation, in your process. This is to make sure your staff know who to contact in case of any problems.

As the deemed employer, you should be receptive to due diligence processes that the client puts in place, subject to General Data Protection Regulation (GDPR) constraints. The client might want to implement these checks as part of their own process, to make sure their status determination statements are being acted upon.

Deemed employer — not contracting directly with the client

As the deemed employer, you should make sure you’re comfortable that the relevant status determination statements are being passed down the labour supply chain. This will allow you to meet your PAYE obligations.

You should have a system in place that lets you identify your workers that are providing their services via their own intermediary. This is so that you know the population of workers you expect to get a status determination statement for. This should identify workers that the off-payroll working rules apply to.

If you do not receive a status determination statement, you can ask the client why. The client may confirm that it is a small company for the purposes of the off-payroll working rules, which means it does not need to apply them. Also, it may not issue a status determination statement for contractors, operating outside the rules.

You should discuss and agree the process for communicating and passing information, with the party directly above you in the labour supply chain. You need to understand the supply chains that you are involved in, and make sure the other parties in the supply chain also understand the rules.

Example 1

This is an example of a client, who is also the deemed employer, with effective PAYE processes.

A large organisation engages a high number of off-payroll workers. They undertake a thorough check to identify all workers that supply their services through their own intermediary. They produce a status determination statement for all workers identified, regardless of which role they are in.

The organisation has a centralised process, to operate the off-payroll working rules, which each business area is required to follow. This is controlled by their Human Resources (HR) department.

Each business area has one or two hiring managers that work with the HR department, to make sure all off-payroll workers are entered onto their off-payroll working system. This system clearly indicates whether or not the status determination has resulted in the off-payroll working rules applying. The payroll department use this to highlight workers that should have PAYE operated on them.

The system includes all the relevant information needed to calculate the deemed direct payment, including:

  • the chain payment
  • any benefits supplied
  • any relevant expenses

The organisation runs a standalone payroll for its deemed employees, and has a software programme which calculates the deemed direct payment.

The payroll department carries out checks on the information supplied, to make sure it’s accurate. They then complete and submit the RTI return, any relevant forms P11D and P11D(b), and make payment to HMRC.

The organisation has a rule in its software that makes sure the RTI indicator on the RTI return is populated. Before the RTI submission, they run an automated programme to identify any anomalies between the information communicated to the payroll department, and the information being used for the RTI submission. This allows them to correct errors in real time.

The organisation carries out regular internal audits on its PAYE systems and processes. They find them to be robust, lowering the risk of them making any errors.

Example 2

This is an example of a deemed employer’s processes that failed to adapt to the increase in the number of deemed employees.

An agency acts as the deemed employer for a number of clients. It has processes in place to operate PAYE. However, it has a high turnover of staff, and has not reviewed its processes since it became a deemed employer, over 3 years ago. In this time, it has grown and is working with more clients.

One of its clients asked the agency to confirm whether PAYE was being operated on all its deemed employees. The agency carried out checks, and discovered that errors had been made. PAYE had not been operated on a small number of the client’s workers.

To find out the full extent of the mistakes, the agency engaged an external company to carry out an audit of its systems and processes. This audit identified a number of issues which had arisen over time, caused by personnel changes and the increase in the number of deemed employees.

The agency had missed status determination statements, and had not carried out secondary checks on the deemed direct payment calculations. This resulted in PAYE not being operated, as well as being operated on the wrong amounts.

The agency contacted the clients affected and advised them of the mistakes. They showed that they had corrected these mistakes, and made improvements to their systems and processes.

The errors resulted in an underpayment of tax and National Insurance contributions in previous tax years. The agency disclosed this to HMRC, and made payment of the arrears, including interest. HMRC considered the disclosure, and concluded that a penalty was due, as the agency had made careless inaccuracies.

HMRC agreed penalty suspension conditions with the agency, to help them avoid future mistakes. At the end of the suspension period, the organisation showed that they’d met the suspension conditions. Because of this, HMRC cancelled their penalty.

The agency conducted an internal audit 6 months later. This showed that the improvements had been effective, as they did not find any errors.

The next section of the guidelines is Outsourcing off-payroll working responsibilities (part 12).

Back to top