28 October 2023
Under current rules, where compliance with the off-payroll working (OPW) rules (sometimes known as IR35) goes wrong, resulting in income tax and National Insurance contributions (NICs) being underpaid, the party held responsible (typically the fee-payer, but potentially the end-user or other entity in the supply chain) is liable for the underpaid income tax and NICs in full. However, in practice, the worker and their intermediary (usually a personal service company) will often already have self-assessed corporation tax on the intermediary, income tax on relevant dividend distributions to the individual, and accounted for income tax and NICs on any relevant earnings payments by the intermediary to the individual under Pay As You Earn (PAYE). Currently, there is no legislative mechanism for offsetting the tax paid by the individual and their intermediary against the liability under the OPW rules, often resulting in HMRC receiving tax twice on the same income.
Proposed changes from 6 April 2024
The government has recognised this discrepancy and in April this year a consultation was launched by HMRC on a possible change allowing the offset of taxes already paid by an individual and/or their intermediary when calculating an income tax and NICs liability that ought to have been deducted under PAYE, where an error has been made applying the OPW rules.
The specific mechanism for this is not yet in place, but is expected soon following the review of responses to the consultation, which closed on 22 June 2023. Potentially this mechanism may work in a similar manner to existing provisions in PAYE regulations that allow the offsetting of income tax and NICs already paid in certain circumstances where HMRC discovers that a directly engaged worker has been incorrectly classed as a self-employed sole trader, instead of employed, for tax purposes.
It is expected that the new mechanism will include the ability to offset a range of taxes the worker and/or their intermediary have already paid against the amount assessed on the deemed employer. These are expected to include corporation tax; class 1 (employee only), class 2 and class 4 NICs; and, income tax paid on both relevant earnings and dividends. The offset will only apply to income from the off-payroll working engagement, and employer NICs are proposed to be excluded.
The changes are proposed to apply to income tax and NICs assessed on or after 6 April 2024, relating to OPW errors in payments since the rules were introduced for the public sector from 6 April 2017 and large and medium-sized private sector organisations from 6 April 2021.
What about ongoing checks and settlements?
Helpfully, HMRC has notified relevant stakeholders that taxpayers may be able to pause ongoing settlements where the proposed changes may apply and the income tax and NICs are expected to be assessed after 6 April 2024.
HMRC has stated it will only consider a pause if:
- the compliance check has otherwise reached settlement;
- the taxpayer has acknowledged in writing an error in applying the OPW rules;
- the gross liability (before offset), including any penalty, has been agreed; and
- appropriate information has been provided to assist HMRC with calculating the set-off.
Where the conditions are met, HMRC will ask the taxpayer if they would like to pause the settlement until after 6 April 2024 when the proposed offsetting changes are expected to take effect. However, interest will continue to accrue on the liability until then, and it is therefore recommended that affected taxpayers consider making an appropriate payment on account.
Whilst the changes are welcome, some taxpayers who have already settled historic liabilities in full may be left feeling dissatisfied that these changes are only being implemented now and were not introduced at the same time as the original OPW and IR35 rules. Unfortunately, it appears unlikely that this new approach will be applied retrospectively.
For more information, please get in touch with Joe Pickering, Susan Ball or your usual RSM contact.