New rules to offset the risk of using off-payroll workers from 6 April 2024

We will shortly be approaching the third anniversary of the extension of the revised off-payroll worker (IR35) administrative rules to medium-sized and large private businesses. Following an announcement in the 2023 Autumn Statement, a new offset mechanism is set to be introduced from April 2024 that will reduce the potential liabilities for engagers and/or fee payers using workers operating via intermediary entities, such as personal service companies (PSCs), where HMRC disagrees with a worker’s status determination the engager makes. Potentially, the new rules will make it more attractive for businesses to use the services of off-payroll workers operating via such intermediaries.

What’s the issue?

Under current rules, if a medium-sized or large business or public sector entity uses an off-payroll worker operating through an intermediary and HMRC disagrees with the status assessment, the engager or fee payer is responsible for all income tax and National Insurance contributions (NICs) due under PAYE in respect of the engagement, together with interest and possibly penalties, potentially back to 6 April 2017 in the case of public sector entities. There is no provision for offset of any income tax or corporation tax paid by the worker or their intermediary. The worker or intermediary is, however, in theory able to seek a repayment from HMRC for themselves.

As a consequence, many risk-averse businesses have made blanket decisions to not use the services of workers operating off-payroll via intermediaries such as PSCs. Many commentators also believe that where the engager is a public sector entity and gets the status assessment wrong, the current rules, with no provision for set off, are inequitable as all the risk and liability is borne out of public funds.

The current rules also create an un-level playing field in that there is already an offset mechanism in place for engagers, subject to HMRC agreement, where a sole trader is treated by the engager as self-employed but HMRC determines that the status assessment is incorrect. 

The proposal

Following the Autumn Statement announcement, draft legislation has now been published with the intention of introducing an offset mechanism for engagers and fee payers where HMRC disagrees with a status assessment involving the engagement of a worker through an intermediary. This will mean a broad alignment with the existing set off rule for sole traders but there will be important differences.

It is intended that the new rules will operate where a ‘trigger event’ occurs on or after 6 April 2024, and will apply to payments made from 6 April 2017 by public sector entities and from 6 April 2021 by medium-sized or large private sector entities. For these purposes, trigger events include situations where HMRC serves notice of a determination or receives a trigger letter of offer in relation to tax due on a payment under an off-payroll working engagement.

The mechanics of the set off 

The proposed legislation will enable HMRC to set off amounts of tax (including income tax, employee NICs and corporation tax) already paid by a worker or their intermediary on income arising from the particular engagement, against a PAYE liability of the engager that is found to have made an incorrect status assessment (or that has not made any status assessment at all) or the fee payer. It should be noted though that the legislation only permits set off of income tax and employee NICs. The engager or fee payer will still be responsible for arrears of employer NICs and, where due, apprenticeship levy.

HMRC has stated that where it is able to establish the income tax and employee NICs that have been paid on the particular income, an offset calculation based on actual figures will be used. Where it can only be established that some income tax and employee NICs have been paid by the worker or intermediary on that income, HMRC will make a best estimate of the amount to be set off based on the information available. There is no prescribed formula for this best estimate, and it remains to be seen how HMRC will ensure that a consistent approach is taken.

Summary

Whilst the proposals are generally welcome, as they will reduce the financial burden and risk for public sector and medium-sized and large private sector entities that get their status assessments wrong, workers who provide their services through intermediaries such as PSCs need to be aware of the consequences of the change.

Businesses using the services of off-payroll workers operating through intermediaries should review their policy and approach to the engagement of such workers in light of the proposed change. In particular, to ensure that HMRC has the necessary information to consider set off, engagers should, as a minimum, maintain details of:

• workers’ full names and National Insurance numbers; and
• full names of the workers’ intermediary entities and, as relevant, their company or partnership reference numbers or VAT registration numbers.

Finally, any business that has an open enquiry in relation to the status of an off-payroll worker operating via an intermediary needs to be mindful that the set off provisions will only apply to a ‘trigger event’ on or after 6 April 2024. Where a status assessment case is finalised before this date, no set off will be available and HMRC has confirmed that it will not reopen cases.

For more information, please get in touch with David Williams-Richardson, or your usual RSM contact.