In a long overdue consultation that runs until 22 June 2023, the government are seeking views on how HMRC can offset liabilities for IR35 to ensure there will be no double taxation.
https://www.gov.uk/government/consultations/off-payroll-working-calculation-of-paye-liability-in-cases-of--on-compliance/off-payroll-working-ir35-calculation-of-paye-liability-in-cases-of-non-compliance
As a result of “widespread non-compliance”, the IR35 legislation was reformed in 2017 for public sector work, and again in 2021 for medium and large organisations in the private sector, whereby the responsibility for determining employment status shifted up the supply chain and away from the contractor. The legislative changes created scope for double taxation however and this was never intended when it was drafted.
If a client were to pay a personal service company (PSC) on the understanding that IR35 did not apply, the PSC and worker would pay their own tax and NIC’s. If HMRC subsequently challenged that position and the client was found to have made an error in their assessment of IR35, the client would be liable for all tax and NIC’s under the deemed payment rules. There are currently no provisions to offset what the PSC has already paid against what would be due by the client, leading to HMRC collecting the tax and NIC’s twice.
For an offset mechanism to be introduced for IR35, new legislation would be required which takes time and has the potential for unintended consequences. In the meantime, whilst this is under consultation, HMRC have implemented a process within its existing powers whereby it will notify workers and their intermediaries that they may be due a refund.
This is a step in the right direction because at least there is an acknowledgement and attempt to correct this double taxation issue, but it is far from perfect and should be nothing more than a temporary measure.
One problem with this current makeshift approach is that HMRC will only notify the worker and PSC of any refund if HMRC has sufficient contact information from the client.
Potential refunds would be notified to the PSC and worker at the conclusion of an enquiry. This is understandable but means HMRC would most likely have to carry out more investigative work to find the relevant contact information with such a passing of time. This places a higher administrative burden on HMRC and it is unclear to what extent HMRC would track down taxpayers. Getting HMRC to pay back money has always been notoriously more difficult than when paying it in.
As the client would face the full liability for tax and NIC’s and lead to a refund to the worker and PSC (potentially a substantial refund), this approach could also create an unfair incentive for workers to change their stance on the IR35 position.
The proposals under consultation would seek to rebalance the liabilities by offsetting what has already been paid on a reasonable basis using information that is available to it. The consultation confirms that “HMRC would be able to use assumptions and best judgement to estimate the amount of tax paid by a worker and their intermediary that represents tax paid on off-payroll working income.”
It is refreshing that HMRC would use relevant tax return data to inform its assumptions and estimates as well as historic patterns of behaviour and tax receipts. The assumptions and patterns of behaviour enables HMRC to keep the offset up to date, rather than only working strictly from filed company accounts and tax returns which could lead to gaps in the offset available because of timeframes for filing.
HMRC have said the information required to contact the worker or look at tax data would be:
If the contractual chain includes an agency, it is likely that all this information will be held as the agency will require this information for its own HMRC reporting purposes. If it is a direct relationship between a client and contractor, the client may not have obtained information such as date of birth and NINO which reduce HMRC’s willingness to contact a worker.
It is therefore good practice for the parties in the supply chain to obtain the necessary information from the worker and the PCS so that there is the best chance of an offset. The client and/or fee payer in the supply chain would also be advised to have indemnities in the contract with the PSC for any tax and NIC’s that it is unable to offset.
The intention is that any offset mechanism would be introduced for any enquiries concluded after April 2024 and they would apply retrospectively. If an enquiry is concluded prior to 6 April 2024, no offset would be appliable, and it would fall within the current approach of HMRC contacting the worker about a refund.
End client organisations may feel more comfortable with the IR35 risk once they know an offset is in place which would reduce their financial exposure, but I would not expect to see a significant shift in behaviour. Judging by previous legislative changes with employment status, a slow and gradual move back to using contractors outside of IR35 is more likely over time.
