IR35 off-payroll working rules - a resolution to the “offset issue”?

IR35 off-payroll working rules - a resolution to the “offset issue”??

Julian Sansum Debra De'Ath Sally Robinson Clare Martin Nick Willis Sam Moore John Harding Paula Letorey Anna Vishnyakov

Headline summary: [2 mins read]

On 27 April 2023 the 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”.??

There has been a lot of debate to support with fixing the offset issue under IR35 i.e. where an end-user becomes liable for PAYE income tax and National Insurance by virtue of the off-payroll regulations, but some other tax and National Insurance has been paid by the Personal Service Company (PSC) or the worker.?

This is a really complicated area with many moving parts and differing scenarios, which means that a simple replication of the current offsetting rules under the self-employment approach (Regulation 72E-G) is very difficult to establish in practice.?

Clearly some of the key areas to consider include:

• How would we take account of various sources of income and identify the income arising from the specific engagement?
• How have expenses been treated, and should they be taxable?
• Has the worker actually paid themselves anything through PAYE, have they paid dividends to themselves and another shareholder of the PSC, have they left retained earnings in the PSC?
• Has Corporate tax been applied?
• How would the timing work for an offset??

We have provided further details below and captured the key areas from today’s announcements, and the HMRC Consultation is linked here

The consultation closes on 22 June 2023 and PwC will be engaging with HMRC on the proposals.??

???================================================

If you have 4 minutes, here is a deeper summary of the details

On 27 April 2023 the 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”.? The announcement was made as part of “Tax Administration and Maintenance Day”, the aim of which is to issue consultations looking to simplify the tax system, tackle the tax gap and modernise the tax system.?

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 the relevant 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 issued today 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 Government does decide to take forward the legislative reform, the intention is that this would appy from 6 April 2024 - and it would apply 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 (which was when the off-payroll rules in respect of the public sector were first introduced).? 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 would not be applied retrospectively to adjust the deemed employer’s settled PAYE liability.???

The consultation closes on 22 June 2023 and PwC will be engaging with HMRC on the proposals.??

This consultation is an important new development within the context of the off-payroll working rules - please do get in touch with myself or your usual PwC contact for further details or to feed in your views in relation to the proposals.???

The Government has also confirmed that it will shortly publish a summary of responses to the 2021 call for evidence on the umbrella company market and that alongside this, it will publish a consultation on policy options to regulate umbrella companies and to tackle non-compliance in the umbrella company market.