Off-payroll working (IR35) – Consultation regarding settlements after an enquiry

In brief

As part of their Tax Administration and Maintenance Day, HMRC have launched a consultation on  the potential introduction of a statutory measure which could impact tax settlements with HMRC where liabilities arise under the off-payroll working (IR35) rules. The consultation proposes that in a settlement scenario, the liable deemed employer could take a credit for an amount of tax relating to amounts that the individual or their Personal Service Company (PSC) has already paid to HMRC in respect of the income they received under their contract. 

Background

In a settlement scenario where HMRC successfully determine that an off-payroll worker should have been treated as an employee for tax purposes, the IR35 rules prescribe that a PAYE income tax and National Insurance Contributions (NIC) liability arises on the deemed employer. In these situations, PSCs have commonly already paid corporate tax on income received and individuals often pay income tax on any dividend they draw from their PSC. 

Current legislation for settlement calculations

Under current rules, there is no statutory mechanism to “set off” any of the tax already paid by the worker or their PSC against the liabilities levied against the deemed employer.  

This can lead either to effective double taxation (if the deemed employer settles all PAYE income tax and NIC due and any other taxes paid are left undisturbed), or to a situation where the contractor/their PSC is able to obtain a refund for the tax they had already paid on their income, effectively suffering no tax at all. 

This current outcome is different to how the legislation treats a situation where an individual is directly engaged (without a PSC). In these situations, a statutory ‘set off’ mechanism is already available.

Current notification process

The consultation document describes a notification process HMRC have put in place as an immediate measure to safeguard against a collection of double tax. Under this process, after a successful IR35 status challenge which results in the deemed employer settling a PAYE and NIC liability, HMRC will inform individual workers and PSCs of their entitlement to claim a refund for the corporation tax and income tax they have already paid on the same income. Whilst this prevents a double tax charge, HMRC accepts that this results in ‘the deemed employer bearing all of the costs of the worker’s tax burden, with the worker bearing none of it’.

Proposed arrangements

The consultation proposes a legislative amendment that would lead to a more equitable sharing of the tax burden between the worker and the deemed employer. This would allow for offsetting tax and NIC already paid by the PSC and the worker against the tax / NIC liabilities assessed on the deemed employer. 

Offsetting would be allowed for the following taxes paid in respect of the income from an engagement:

     -   Corporation tax paid by the worker’s PSC

     -   Income Tax and employee NIC paid on any salary the worker received from their PSC

     -   Class 2 and Class 4 NIC paid by the worker (where a partnership is used as intermediary)

     -   Tax paid on dividends drawn by the worker from their PSC

However, no set-off would be available for:

     -   Employer NIC paid by the PSC on any salary paid from the PSC to the worker

     -   Tax or NIC paid by other employees, directors or shareholders of the PSC

Because the exact amounts paid in relation to a particular income stream can be difficult to identify and calculate, HMRC propose that the legislation should allow HMRC to use assumptions and best judgement to make reasonable estimates when calculating the amount of tax already paid by the worker and their PSC. 

Where HMRC determine that a set-off can be given, the consultation proposes that the worker and PSC would then be barred from making a claim for repayment of the tax / NIC. The worker and PSC would be given 30 days to appeal against the decision. 

Application date

If the government proceeds with the proposals, it is proposing to introduce the relevant legislation from 6 April 2024. The consultation states that the new arrangements could apply to liabilities assessed on or after 6 April 2024. 

However, where an enquiry is settled after this date, any liabilities arising from deemed direct payments made since 6 April 2017 would be covered. Where a compliance check has already concluded and the deemed employer has already agreed to settle by 6 April 2024, the new policy would not apply and HMRC would instead continue with the notification procedure set out above. 

The consultation does not provide full clarity on how the application of the rules will apply prior to 6 April 2024 for organisations with an open enquiry as there is no definitive confirmation on what HMRC consider ‘assessed’ means in this context. For example, does “assessed” mean the issue of a Regulation 80 Determination, or even a notification in writing that HMRC consider liabilities are due? In addition, how would a taxpayer’s right of appeal influence that position? We plan to seek further clarity on these points. 

Who will be affected?

Public sector organisations and medium/large private sector organisations who have contingent labour with PSCs in their supply chain. The consultation will be of interest to any organisation engaging off-payroll workers ‘outside IR35’/deemed self-employed, and in particular those where HMRC has already opened an enquiry into IR35, or where ongoing dialogue on employment status is in progress.

Consultation process

The consultation period will close on 22 June 2023. Interested parties can respond by emailing offpayrollworking.legislation@hmrc.gov.uk

Deloitte’s view

We welcome HMRC’s commitment to explore a legislative solution to this problem, which we, along with professional bodies, have highlighted is required for some time. We strongly support the need to address the current position, which can lead to inequitable outcomes. 

The consultation raises important questions for those who are currently in the process of resolving an HMRC IR35 enquiry, particularly in view of the reasonable timeframe from now until the 6 April 2024 application date. It also brings considerations for those who are concerned about settling any IR35 liabilities they may have identified themselves.  

Importantly, the consultation does highlight the continued need to implement and maintain robust systems and processes to minimise the risk of HMRC successfully challenging the IR35 status of contractors and of the need to maintain appropriate records to facilitate any future offsetting under the proposed legislation. 

Please look out for more details here.