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May 31, 2023

Off Payroll Working – Consultation process to consider the off set of taxes already paid in cases of non-compliance (Part 1)

Off Payroll Working – Consultation process to consider the off set of taxes already paid in cases of non-compliance (Part 1)

HMRC have recently announced an informal consultation process where they are considering the wider implications of allowing credit (off-set) for taxes already paid by a worker and their personal service company (PSC) in cases where the worker’s services have been incorrectly deemed as falling outside IR35 for Off Payroll Working Rules by an end client.

The informal consultation process is due to close on 22 June 2023. The conclusions will be announced shortly thereafter, with any changes likely to be effective from 6 April 2024.

The Current Position

The Off Payroll Working Rules require the end client to be responsible for considering and determining the deemed employment status of a worker whose services are provided through their personal service company (PSC).

If the working relationship is deemed to fall inside IR35 then the deemed employer (the business paying the worker’s fees) is responsible for deducting PAYE, National Insurance Contributions and Apprenticeship Levy (if applicable) and accounting for this to HMRC

Where cases of non-compliance of the Off Payroll Working Rules occur, the deemed employer is liable for any failure to deduct and account for these taxes.

Presently there is no provision under the taxes legislation governing Off Payroll Working for HMRC to off-set taxes paid by a worker and / or their personal service company (PSC) where an error has been made in determining a worker’s deemed employment status.

Where HMRC establish an error has occurred, they will recover liability to PAYE, NIC’s and Apprenticeship Levy (if applicable), together with interest and penalties from the deemed employer.

This process will then entitle the worker and their PSC to make a claim to HMRC for a full refund of taxes already paid.

What taxes are likely to have been paid by a worker and their PSC?

The worker and the PSC are likely to have accounted for and paid the following taxes, whether through payroll, self-assessment and statutory accounts submissions.

  1. The Worker:

    1. Pay As You Earn (PAYE) in respect of any salary they receive from their PSC.

    2. Class 1 Employee National Insurance Contributions (NICs).

    3. Income Tax in respect of any dividends received.

  2. The PSC:

    1. Class 1 Employers National Insurance Contributions (NICs)

    2. Corporation Tax of the profits of the PSC.

    3. Apprenticeship Levy (where applicable).

Proposed Changes

The consultation process is considering whether in cases of non-compliance to grant HMRC the powers to offset taxes already paid and account for by a worker and their PSC and this is welcomed.

The different taxes and classes of NICs that would be included as part of a set-off are:

  • Corporation Tax paid by a worker’s PSC on the income from the off-payroll working engagement;
  • Income Tax and employee NICs paid on a salary to the worker from the worker’s intermediary, where the salary is paid out of income from the off-payroll working engagement
  • Class 2 and 4 NICs paid by the worker with respect to income from the off-payroll working engagement, where the worker’s intermediary is a partnership or another individual
  • Tax paid on dividends received by a worker from their own PSC, where the dividends are paid out of income from the off-payroll working engagement

HMRC do not intend to include the following as a part of any set-off:

  • Employer NICs paid by the worker’s intermediary. This is because employer NICs is a distinct and separate charge levied on the employer. The worker’s intermediary is not the employer for the purposes of the off-payroll working rules. Instead, the intermediary would need to claim a refund from HMRC
  • Class 3 NICs payments made by the worker. This is because these are voluntary payments that may be made by the worker in certain circumstances
  • Tax and NICs paid on any salary and dividends received by any other employees, directors or shareholders of the worker’s intermediary. This is because these payments are not related to the services provided by the worker to the client

Penalties where errors are made

With regard to the question of penalties, the consultation process is suggesting;

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.

Where a penalty is charged, the amount of the penalty 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 on the basis the consultation recommendations are implemented, 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.

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 seeks
  • Treating every freelance worker as inside IR35 and Off Payroll Working is likely to increase costs.

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.
  • 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.). 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 Geoff Heron and Adrian Williams 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.

The Directors 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 Apps 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.