IR35 off-payroll working rules - a resolution to the ‘offset issue’?

On 27 April 2023 the UK Government announced that it is seeking to address an issue in relation to the IR35 off-payroll working rules - commonly known as the ‘offset-issue’. We consider what the resolution could mean for businesses.

What could this mean for employers?

We’re expecting greater use and engagement of off-payroll workers to manage talent scarcity and flexible resourcing without the administration of full employment.

Depending on the outcome of the consultation and the specifics of each case, this could provide some additional protection for end users of off-payroll labour to reduce or mitigate exposure to costs, where an incorrect assessment has historically been reached.

The UK Government announcement was made as part of Tax Administration and Maintenance Day, the aim of which is to issue consultations looking to simplify and modernise the tax system, as well as tackle the tax gap.

This is a long-called for reform from businesses and professional bodies, and was also identified as an issue by the National Audit Office in its review of the implementation of the off-payroll working rules.

The proposed reform relates to circumstances in which a deemed employer is considered by HMRC to be non-compliant with the rules in relation to any particular engagements. Typically HMRC then seeks to collect the relevant PAYE tax and NIC in respect of those engagements from the deemed employer, as they are considered to have failed in their obligations. However, there is currently no legislative mechanism under which the relevant amounts due to HMRC from the deemed employer can be offset against amounts already paid by the intermediary/individual in relation to the engagement. This therefore potentially results in the same income being taxed twice.

In addition, where the deemed employer accepts HMRC’s determination regarding the status of the engagements, the relevant intermediary/worker becomes entitled to claim back any tax that they have already paid to HMRC in relation to the engagement, should they become aware that this is the case. HMRC has implemented a process within its existing powers to notify workers and their intermediaries that they may in fact be due a refund for taxes already paid on the engagement.

Discussions regarding the offset issue have been continuing for some time, with HMRC engaging with stakeholders regarding whether, for example, a legislative solution was required (there is already a legislative offset mechanism HMRC can use in the context of direct engagements) to allow HMRC to take account of taxes paid by the intermediary/individual, or whether there was a viable non-legislative alternative.

The consultation recognises that the current process can result in the deemed employer bearing the full cost of the PAYE tax and NICs liability, and sets out HMRC’s considerations for, and invites views on, a potential alternative solution. The proposal would introduce new legislation to share the tax and NICs liability between the deemed employer and the individual/intermediary, by estimating a set-off for tax and NICs already paid by the individual and their intermediary.

Under the proposals the individual and their intermediary would not be required to pay any additional tax or NICs as part of this set-off. The different taxes and classes of NICs that would be included are:

  • Corporation tax paid by an individual’s PSC on the income from the off-payroll working engagement.
  • Income tax and employee NICs paid on a salary to the individual from their intermediary, where the salary is paid out of income from the off-payroll working engagement.
  • Class 2 and 4 NICs paid by the individual with respect to income from the off-payroll working engagement, where the 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 does not intend to include the following as a part of any set-off:

  • Employer NICs paid by the individual's intermediary.
  • Class 3 NICs payments made by the individual.
  • Tax and NICs paid on any salary and dividends received by any other employees, directors or shareholders of the individual’s intermediary.

If, following the consultation, the UK Government does decide to take forward the legislative reform, the intention is that this would apply from 6 April 2024 to income tax and NIC liabilities assessed on or after 6 April 2024 which arise as a result of an error in respect of payments made from 6 April 2017 (subject to statute of limitations and tax management act time limits for claims). 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, the policy is not expected to be applied retrospectively to adjust the deemed employer’s settled PAYE liability.

The consultation closes on 22 June 2023 and this is an important new development within the context of the off-payroll working rules. Please contact us directly if you require further details, or if you would like to discuss.

Contact us

Julian Sansum

Julian Sansum

Partner, PwC United Kingdom

Tel: +44 (0)7919 057454

Matt Bridger

Matt Bridger

Director, PwC United Kingdom

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