HMRC has launched a consultation to look at reform of the double taxation problem with off-payroll working payments
HMRC is considering whether legislation should be changed to offset taxes already paid by a contractor or their personal services company in the event that they have been incorrectly classified as a self-employed trader.
Current legislation does not allow HMRC to set off amounts of tax already paid by a contractor and their intermediary against the PAYE liability of the deemed employer – meaning that businesses can often be taxed twice.
HMRC is considering whether to allow for such a mechanism for off-payroll working purposes, which would work in a similar way to existing provisions in the PAYE Regulations 2003.
HMRC said that any changes would be implemented from 6 April 2024.
The changes would allow the setting off of taxes already paid in certain circumstances where HMRC discovers that a contractor has been incorrectly classed as a self-employed sole trader instead of employed for tax purposes.
Currently, the off-payroll working IR35 rules state that where an individual is working like an employee, they should pay tax like an employee – regardless of whether they are working through their own intermediary personal services company.
However, HMRC does not factor in the tax already paid by the intermediary during the engagement. This means that businesses which are hiring contractors and have to conform with the off-payroll working rules, are often overtaxed under the rules, if HMRC finds non-compliance.
In this situation, HMRC collects more tax than is due because the worker and their intermediary may have already paid income tax and National Insurance contributions (NICs) on the same income in the belief that they were outside the rules.
For example, if a contractor is paid a fee of £50,000 and assessed as a worker outside the off-payroll working rules, they may still be liable to additional tax payments.
When carrying out a compliance check, HMRC could conclude that the determinations are incorrect, and that the engagement between the company and the intermediary should have been inside the off-payroll working rules.
This means that the company should have operated PAYE on the £50,000 payment and paid the net amount. Therefore, they would be deemed an employer and liable to additional income tax and NICs.
However, HMRC will have already collected £7,160 of corporation tax and £404 of employer NICs from the personal services company, and £2,439 of income tax from the worker.
As the client is liable to pay the full amount of the income tax and NICs due under PAYE, HMRC will have collected an additional £10,003 tax and NICs.
Susan Ball, employment tax partner, RSM UK and president of the Chartered Institute of Taxation (CIOT) said: ‘This consultation is welcome news, and long overdue, as the off-payroll working IR35 rules have been causing headaches for workers and hiring organisations for years now.
‘If implemented, the new rules will not come into force until April 2024 though and will not be applied retrospectively.
‘This means hiring organisations may be tempted to drag their heels with any HMRC compliance checks in the meantime. Typically, a case can take 18-21 months to conclude, and we may see organisations procrastinating over any HMRC compliance checks in the hope that they can take advantage of the new rules when they are introduced.’
The speed at which the measure is likely to go through is also welcomed by IR35 experts.
Dave Chaplin, CEO of IR35 Shield said: ‘Whilst this is labelled a consultation, the speed and narrow focus of the single solution reads like an announcement. The short consultation window of only eight weeks, followed by a response later this year, is a clear signal that the fix will be happening in the next Finance Bill 2024.
‘The double taxation flaw in the off-payroll rules was grossly unfair on businesses who were being threatened with tax bills more than four times the perceived underpayment of tax.’
The closing date for comment is 22 June 2023.
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