IR35 set-off changes to address double taxationby
Rebecca Seeley Harris explores the new ‘set-off’ changes to the off-payroll working rules, which addresses double taxation concerns and aims to ensure a more equitable solution for clients.
On 27 April 2023, HMRC published its consultation on the Off-payroll working (IR35) – calculation of PAYE liability in cases of non-compliance. It’s been a long time coming, in fact, six years after HMRC was first alerted to the problem following on from the off-payroll working reforms that were brought into the public sector in 2017.
The consultation sought input into the potential legislative change to allow HMRC to set-off tax and national insurance contributions that have already been paid by the worker and their intermediary. This was to be set-off against the PAYE liability of the deemed employer, which would result in a more equitable distribution of the cost of the worker’s tax liability.
As a result of the consultation, the government announced on 22 November 2023, that it intended to proceed with legislative change that will prevent the same income being taxed twice. The policy applies to income tax and national insurance contributions (NIC) assessed by HMRC on or after 6 April 2024, from off-payroll working errors in payments since 6 April 2017.
This would replace the process whereby HMRC seeks to notify workers and their intermediaries regarding a potential entitlement to claim a repayment of taxes overpaid.
HMRC has written to a number of taxpayers who have an open compliance case nearing settlement to inform them that they may be able to pause their settlement subject to certain conditions. This is in order that their liabilities can be settled taking into account the set-offs.
HMRC said it would only consider a pause in the settlement if:
- the compliance check has reached settlement, and:
- the organisation has acknowledged in writing an error in applying the off-payroll working rules
- the deemed employer’s gross liability, including any penalty, has been agreed
- the organisation gives us the information we need to work out a set-off, which is:
- the name of the personal service company and company registration number
- the worker’s full name or national insurance number
In the meantime, off-payroll compliance checks will continue.
Settled compliance checks
Where a compliance check has already concluded before 6 April 2024 and the deemed employer has agreed to settle the PAYE liability based on the legislation at the time, this policy would not be applied retrospectively to adjust the deemed employer’s settled PAYE liability. In these cases, HMRC will notify the worker and their intermediary of their potential entitlement to claim a repayment of taxes overpaid, where the information is available.
HMRC will calculate the amount of corporation tax, income tax, and NICs that has already been paid by using assumptions and its best judgement.
Once the set-off has been calculated, HMRC will issue a notice to each worker and PSC informing them that tax has been underpaid on their engagement, with a set-off applied to the client’s PAYE liability for tax they have already paid. They are not allowed to claim this tax back.
The worker and PSC would have the opportunity to appeal this decision, to prevent a set-off being given in situations where they did not actually receive the payment or they believe the client is not due a set-off.
The worker and their intermediary would not be required to pay any additional tax or NICs as part of this set-off.
Any set-off that reduces the deemed employer’s income tax and NICs liability will not affect the application of the penalties 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.
This applies to the off-payroll working reforms in Chapter 10, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (OPW), the legislation that replaced IR35 for medium and large companies and the public sector.
The relevant legislation which was introduced in the Autumn Statement 2023 will be amended in Chapter 3 of Part 11 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). This will introduce the following new powers:
- in cases where the deemed employer of an individual who worked via their own intermediary would be liable to pay an amount under PAYE regulations in respect of an engagement, and an amount of income tax or corporation tax is estimated to have already been paid or assessed in relation to the engagement, the amount will be treated as having been recovered from the individual or intermediary, and that amount will not be recoverable from the deemed employer;
- this amount treated as having been recovered will be the best estimate that can reasonably be made by an officer of HMRC in respect of the income tax or corporation tax already paid or assessed;
- provision will be made to prevent a person making a claim for the repayment of, or a claim for relief in respect of, deducting, or setting off the amount treated as having been recovered; and
- the provisions will be in respect of deemed direct payments made on or after 6 April 2017.
The set-off will mean that the client should be reassured that they are not footing the tax liability entirely on their own and that it is now a more equitable solution.
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Rebecca is the UK's most prominent thought leader and leading expert in ‘employment status’ including IR35, off-payroll working and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as...