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woman running payroll | accountingweb | Fairness restored as Chancellor signals fix to off-payroll legislation
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Fix to off-payroll legislation restores fairness

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IR35 geeks have reason to celebrate with new rules meaning that the tax burden will be shared more equitably between employers and employees.

23rd Nov 2023
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Among the wash of voter-attracting tax cuts made by the Chancellor in his Autumn Statement 2023, one fascinating new policy wasn’t mentioned in the boisterous Commons. This was possibly because (a) it’s not a tax cut, and (b) no one gets excited about the title of “Off-payroll working: calculation of PAYE liability in cases of non-compliance”, other than IR35 geeks.

The reference is to the longstanding structural flaw in the off-payroll legislation, which came into force in the public sector in April 2017 and the private sector for medium and large businesses from April 2021.

Taxed twice

The “double-taxation flaw” or “Lack of offsets problem” breached a fundamental tenet of the tax system – earnings are not supposed to be taxed twice. However, due to the flaw, first flagged to HMRC in March 2018, contractors and firms paid two lots of tax on the same money. The effect was that when HMRC stepped in to correct firms’ IR35 status classification errors, firms received up to four times more tax bills than they should. It’s no wonder some firms chose to blanket ban contractors.

For years, HMRC resisted calls by multiple stakeholders and tax experts to resolve the issue. It wasn’t until ministers got involved, followed by the National Audit Office and Public Accounts Committee, that the Treasury agreed to fix the problem in December 2022. 

One year later, and we have hidden away in section 5.50 on page 91 of the Autumn Statement 2023 document this festive tax cracker: “5.50 Off-Payroll Working (IR35) – calculation of PAYE liability in cases of non-compliance – The government will legislate in the Autumn Finance Bill 2023 to allow HMRC to reduce the PAYE liability of a deemed employer to account for taxes paid by a worker and their intermediary on payments received where an error has been made in applying the off-payroll working rules.”

The fix is coming in the Autumn Finance Bill 2023, for April 2024, and will apply retrospectively, back to 2017, ensuring firms do not end up saddled with unfair tax bills more than four times what they should be. 

While you could argue that it’s a 75% reduction in the tax risk, the reality is that firms would have litigated to tax tribunal and probably sought to use other routes aligned with the Demiborne principles, only to pay a fair amount anyway. The legislative fix gets the same result during the settlement process and should help reduce protracted and unnecessary litigation.

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How it works

For example, under the pre-fixed rules, a firm hiring a contractor “outside IR35” for £100,000 a year, which HMRC challenged, would face a £45,494 tax bill consisting of employee tax deductions of £32,950 for employees’ national insurance contributions (NICs) and income tax, and employers’ NICs of £12,544.

The contractor’s company (assuming zero running costs for simplicity) would have paid corporation tax of £22,750 and dividend taxes of £12,230, a total of £34,980.

The difference between the tax paid and what HMRC argues should be paid is £10,515. But, under the existing rules, the client must pay £45,494, and the contractors’ company can reclaim the entire £34,980 – which is unfair. 

Under the new rules, once offsets are considered, they would pay around £10,515 – roughly 10% more on top of what they paid the contractor in the first case.

Ultimately, the policy will achieve the government’s stated objective to “share the tax burden more equitably between the deemed employer and worker”.

Next steps to prepare?

For clients and contractors, it is essentially business as usual. The changes will mean that if they get an IR35 status determination wrong, they won’t be hit with a disproportionate tax bill compared to the actual underpayment of tax.

Visit our dedicated Autumn Statement 2023 hub here to find all related articles from our experts. 

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