Kye Burchmore is Director of Trinity Tax and the author of Bloomsbury Professional's Off Payroll Tax Handbook.
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Section 17 of the Finance Act 2024 came into force from 6 April 2024 and means the tortoise has finally caught up with the hare and addressed the issue of not being able to offset tax and NIC’s already paid, against IR35 liabilities.
When the IR35 legislation was amended in 2017 and 2021 to move the responsibility for determining IR35 status up the contractual chain (in the public sector or medium/large companies in the private sector), no provisions were included to offset the tax and NIC paid by the intermediary and individual against the liability the client/fee payer would face if HMRC successfully overturned the client’s IR35 determination.
The result of this omission would lead to double taxation in the first instance, with the deemed employer bearing the entire tax burden as opposed to the usual position of the employer and employee paying their own share.
In theory, the issue of double taxation issue would be resolved because the intermediary and individual would be entitled to claim back any tax and NIC already paid to HMRC for that engagement. This is of course provided they are aware of the reclassification. HMRC also implemented its own process to attempt to notify intermediaries and individual’s that a refund would be due.
Claiming back the money already paid to HMRC was not a simple solution however and still left the unintended consequence of the client being liable for both employer and employer tax and NIC contributions.
If a client is aware they will bear the whole tax burden, the consequences of reaching the wrong IR35 decision are amplified (and bear in mind IR35 is a grey area of law to start with, and difficult to reach a definitive conclusion). The result is for clients to naturally be more conservative over IR35 and in many cases, have the default position that all contractors are caught by IR35. Individuals can then find themselves taxed like an employee but with none of the benefits or protections.
The Government announced on 27 April 2023 that it would consult on an issue in relation to the IR35 off-payroll rules, commonly referred to as the “offset issue”. An eight-week consultation then followed which ultimately led to the Finance Act 2024 including a new section (688AB Workers providing services through intermediaries etc: cases where taxes already paid) into ITEPA 2003.
The taxes and NIC’s that would be included within the offset must be from the off-payroll engagement and include:
The following will not be included within any offset:
The legislation applies from 6 April 2024 for any liabilities settled after that date. If a liability was settled prior to the new tax year, the offset will not be available.
