New off-payroll IR35 proposals are welcome, and not before time

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Susan Ball, Employment Tax Partner, RSM UK and President of CIOT discusses proposed options to offset tax.

The Government recently announced a consultation to address the double tax issue arising as a result of the off-payroll IR35 rules. The consultation runs until 22 June 2023. 

The announcement was part of several other potential measures looking to simplify the tax system and tackle the tax gap. The IR35 announcement is welcome news, and long overdue, as the off-payroll IR35 rules have been causing headaches for workers and hiring organisations for years, and this will at least see a change to one of the most significant issues.

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The off-payroll IR35 reforms were introduced for clients in the public sector in 2017 and were extended to include medium and large clients in the private and voluntary sectors in 2021. The reforms shifted responsibility for determining employment status to such a client, and for ensuring the right tax and National Insurance is paid, to the same client, or the fee payer if this is different. 

The proposed additional reform covers situations where HMRC considers a client or fee payer to be non-compliant, meaning they become liable for Income Tax and National Insurance contributions (NICs) that should have been deducted from the off-payroll worker’s fees. 

Currently there is no legislative mechanism under which the relevant amounts due to HMRC by the client or feepayer, such as an agency further down the labour supply chain, can be offset by amounts already paid by the intermediary, or an individual, for the same work. This can result in tax and NIC being paid twice on the same income. 

This issue had been raised by the professional bodies and other stakeholders, and was also highlighted more recently by the National Audit Office and Public Accounts Committee.  

Under the proposed new rules, the ability to offset depends on whether HMRC can trace the relevant records on its systems, therefore it’s essential for clients and feepayers to ensure they retain sufficient information. The worker and intermediary would be notified via a direction notice. 

The worker and their intermediary would not be required to pay any additional tax or NICs as part of this set-off. The different taxes and classes of NICs that would be included as part of a set-off are: 

  • Corporation Tax paid by a worker’s Personal Service Company (PSC) on the income from the off-payroll working engagement 
  • Income Tax and employee NICs paid on a salary to the worker from the worker’s intermediary, where the salary is paid out of income from the off-payroll working engagement 
  • class 2 and 4 NICs paid by the worker with respect to income from the off-payroll working engagement, where the worker’s intermediary is a partnership or another individual 
  • tax paid on dividends received by a worker from their own PSC, where the dividends are paid out of income from the off-payroll working engagement.

These proposals would replace the current process whereby HMRC seeks to notify workers and their intermediaries regarding a potential entitlement to claim a repayment of taxes overpaid.  

Any set-off that reduces the deemed employer’s Income Tax and NICs liability will not affect the application of the penalty’s regime for inaccuracies. Where there has been an incorrect status determination, HMRC will consider whether to charge a penalty in line with its existing guidance. 

Assuming the proposals are implemented, they will come into force in April 2024 working in a similar manner to existing provisions in the PAYE Regulations 2003 (SI 2003/2682) that can allow “off-setting” of taxes already paid in certain circumstances where HMRC discovers that a directly engaged worker has been incorrectly classed as a self-employed sole trader, instead of employed, for tax purposes. 

Organisations currently subject to a compliance check by HMRC, or receiving one over the coming months, should note that where checks conclude before 6 April 2024, this new policy will not be applied, however if they are concluded afterwards, it will apply retrospectively. This means that in the meantime hiring organisations may be tempted to drag their heels with any HMRC compliance checks.  

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