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Feb 9, 2024

Off Payroll Working Consultation Conclusion - Off setting taxes already paid in cases of non-compliance (Part 2)

HMRC have recently announced the conclusions to their consultation process of giving credit (off-set) for taxes already paid by a worker and their intermediary in cases involving the IR35 and Off Payroll Working rules.

HMRC have recently announced the conclusions to their consultation process of giving credit (off-set) for taxes already paid by a worker and their intermediary in cases involving the IR35 and Off Payroll Working rules.

In essence, giving credit for the Tax and National Insurance Contributions (NICs) already paid by a worker and their intermediary in relation to deemed employment income put forward by HMRC will come into effect from 6 April 2024. 

This follows the principles from a previous Special Commissioners case dating back to 2005 (Demibourne Limited v HM Revenue & Customs [2005] SpC 00486) which resulted in HMRC recognising that employers have a right of restitution in respect of PAYE liabilities, by offsetting the tax paid by an individual against an employer's PAYE liability.

These changes are welcome, although in some quarters it is argued they do not go far enough.

The Current Position

As a reminder there is currently no provision under tax legislation governing Off Payroll Working for HMRC to off-set taxes paid by a worker and / or their intermediary personal service company (PSC), limited liability partnership (LLP) or partnership where an error has been made in determining a worker’s deemed employment status. This will now change as a result of the consultation process conclusions.

Changes effective from 6th April 2024

We have summarised in the table below, the different taxes and classes of NICs paid by the worker and their intermediary on the income from the off-payroll working engagement which will be included or excluded as part of the set-off for non-compliance.

Set Off Available

Set Off Not Available

  • IT-PAYE.
  • Employee Class 1 NIC.
  • Income Tax paid on dividends.
  • Corporation Tax (CT) paid by the worker’s intermediary.
  • Income Tax (worker’s share of partnership).
  • Class 2 & Class 4 NIC (worker’s share of partnership).
  • Employers Class 1 NIC.
  • Class 3 NICs.
  • Tax and NICs paid on any salary and dividends received by any other employees, directors or shareholders of the worker’s intermediary.
  • Corporation Tax paid by PSC in respect of loans to participators in close company.

How will HMRC calculate the Tax and NIC already paid by the worker and their intermediary?

HMRC indicated they do not have access to all the information necessary to accurately determine the exact amount of Tax and NICs already paid by the worker and their intermediary for a particular Off Payroll Working engagement.

The time and steps required to identify and gather these additional details, during an enquiry process (no doubt already probably lengthy !!!) would therefore be prolonged to the detriment of all parties concerned (i.e. the worker, their intermediary, end client, professional advisors and HMRC).

The legislative change will allow HMRC to estimate the tax and NIC credits (off-set) available. In this regard HMRC say (only time will tell) they will work with the deemed employer in ensuring all relevant information is taken into account when arriving at their estimate. They have indicated their methodology and assumptions will be clearly set out and explained.

For reasons of confidentiality there is likely to be certain information relating to the worker and their intermediary HMRC will be unable to share. 

Notifying the Tax & NIC credits to be applied?

Where an amount of tax and NIC credit (off-set) is to be applied where the deemed employer is held liable for liability arising under the Off Payroll Working legislation, will be notified to the worker and their intermediary via a direction notice.

The worker and their intermediary will not be able to submit amended tax returns to claim repayment for the amounts which have been off-set against the deemed employers PAYE liability. However, the worker and the intermediary can dispute HMRC’s notice of direction by submitting additional and relevant information for further consideration before amounts are finalised.

The deemed employer will have no right of appeal in respect of HMRC’s calculations of the Tax and NIC credit available for set off, or indeed where they refuse to grant a tax and NIC direction at all. 

The only option available for deemed employers will arise when HMRC issue formal determinations for PAYE and NIC when an appeals process can be initiated.

It needs to be borne in mind that any deemed employer in dispute with HMRC over the Off Payroll Working legislation will fully appreciate the complexities involved and the time processes involved in dealing with the tax authorities.

What worker and intermediary information will HMRC require?

It is probable, information currently held by deemed employers for a number of reasons.

Where HMRC challenge a worker’s deemed employment status and seek to assess the deemed employer, in order for the tax authorities to give credit for taxes and NIC’s already paid, as a minimum the following information will be required;

  • The worker’s name or national insurance number.
  • The intermediaries name.
  • The intermediaries Company Registration Number or VAT Registration Number.

As part of best practice, and regardless of any potential future HMRC challenges, we recommended, all businesses caught within the Off Payroll Working rules maintain and retain at the very minimum the above information at the outset of any engagement.

We say this as any HMRC enquiry will no doubt likely occur some period after the worker engagement has taken place. Trying to recall or gather information after the event is likely to prove time consuming and burdensome.

Penalties where errors are made

HMRC have re-iterated in cases where liability arises that 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.

The amount of the penalty, if sought, will be calculated on the full Income Tax and NICs liability, not the amount after a set-off. This is because the error has still resulted in the full liability becoming due, even though some of this liability is being set-off against amounts already paid by the worker and their intermediary. This is in line with HMRC’s standard approach to penalties in employer compliance checks.

Conclusion

Notwithstanding the question of off-set is welcomed, as we have previously set out, the bigger question for businesses required to adhere to the Off Payroll Working rules is to get your processes and decisions right at the point of engagement and avoid the argument with HMRC.

Being involved in a HMRC dispute as to whether a worker’s engagement is either inside or outside IR35 is time consuming and financially costly.

There is no need to make “knee jerk” reactions and conclude all engagements are inside IR35 for a number of reasons;

  • Understanding deemed employment status criteria and applying these correctly could result in the arrangement being outside IR35 and Off Payroll Working.
  • You may deter attracting the quality freelance worker(s) / PSC(s) your business needs.
  • Treating every freelance worker as inside IR35 and Off Payroll Working is likely to increase costs.
  • One size does not fit all.

Similarly, taking a chance and treating all engagements are outside IR35 and Off Payroll Working, is likely to result in;

  • Incorrect decisions.
  • Dispute with HMRC.
  • Time consuming and financially costs with regard to HMRC settlement.
  • May lead HMRC to investigate other areas of the business.

What help is available?

Inspired Employer Solutions Ltd (IESL) have developed IR35 App (www.ir35app.co.uk) which includes a short 60 second info video. This is a first to market solution which cannot be found elsewhere and is specifically adapted to your business. This unique and unrivalled paperless software application which delivers a bespoke and innovative approach to IR35 and Off Payroll Working. Implementing the necessary defence mechanisms that will educate and protect your business and make HMRC think twice before challenging. 

IR35 App is backed by IESL’s team of dedicated specialists. The Directors Adrian Williams and Geoff Heron are former investigators with HMRC and Senior Managers with a Big 4 accountancy practice have the expertise and knowledge to help.  IESL’s Directors are also joined by Steve Gretton; a former Employment Status Inspector who spearheaded IR35 investigations within HMRC. We believe no other “Big 4” or accountancy practice in the UK can boast such and array of hands on expertise.

How do you get IR35 App?

IR35 App is not available as an “off the shelf” product; why? - because the Directors understand that the decision makers within businesses caught up in the Off Payroll Working rules and interested in investing in this unique product will want to understand its benefits and value prior to purchase.

Adrian and Geoff believe the best way to move this forward is to hold a face to face meeting, where we can;

  • Demonstrate the IR35 App.
  • Discuss the “extras” that come with IR35 App.
  • Discuss IR35 App IT support.
  • Confirm Pricing.
  • Answer any questions.

For more information, to include the timeframe for implementation, please contact Adrian or Geoff by following the IR35 App link at www.ir35app.co.uk