Off-Payroll Working (IR35) - calculation of PAYE liability in cases of non-compliance

The measure

The government has today published the outcome of its consultation on proposals permitting HMRC to account for taxes already paid by the off-payroll worker and/or their intermediary (typically a personal service company) when calculating a deemed employer’s PAYE liability under the off-payroll working rules. This “set-off” will be applicable where the off-payroll worker has been incorrectly determined as self-employed for the purposes of the off-payroll working rules. 

The government noted that responses received were supportive of the proposed measures and recognised the practical difficulties in collating information leading to the need for HMRC to make estimates using their best judgement. However, several respondents to the consultation felt that the methodology used should be open to public scrutiny. 

Although several amendments were proposed by respondents, the government has decided to stick with its original proposals. To recap, the measures proposed in the consultation would permit offset for the following taxes paid in respect of the income from an engagement: 

• Corporation tax paid by the worker’s personal service company (“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); and
• Income 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; or
• Income tax or NIC paid by other employees, directors or shareholders of the PSC. 

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

Who will be affected?

Public sector organisations and medium/large private sector organisations who have off-payroll labour with intermediaries such as PSCs in their supply chain, and workers who have been incorrectly determined as self-employed for the purposes of the off-payroll working rules. 

The set-off will apply to deemed direct payments made from 6 April 2017, where settlement has not already been reached.

When will the measure come into effect?

The measures will be effective 6 April 2024.

Legislation will be introduced in Autumn Finance Bill 2023 to enable HMRC to make the necessary regulations once the Finance Bill becomes law.