In his Autumn Statement on the 22 November, Chancellor Jeremy Hunt confirmed that from 6 April next year the much-anticipated new IR35 set-off mechanism will be introduced to address the problem of double taxation in cases of misclassification. As we’ll hear in a moment, it spells good news for end users.
A reminder. The offset mechanism will be a change to the IR35 rules in cases where the Revenue decides that the original status determination was incorrect and the contract falls inside the scope of IR35. It will mean that taxes due can be offset against those already paid by the contractor's limited company meaning that the corporation tax, income tax and NICs already paid by the contractor will be subtracted from the total arrears due from the end client and contractor. That’s a departure from the current process by which there was concern over double taxation as the deemed employer, or sometimes the contractor, must pay the full PAYE and NIC amounts due while the contractor claims a refund for corporation tax and wrong income tax already paid.
From the start of the new tax year in April 2024, the new rules will come into place for all contracts in both the public and private sectors. Not only will these rules apply to any contracts going forward from here but also will be available for arrears going back to April 2017, when IR35 was first changed for the public sector.
Back in June when the government was consulting on this we highlighted a tricky issue facing a number of end users in the lead up to the mechanism being introduced. As we flagged in our programme ‘Timing issue with long awaited IR35 set-off’, the consultation made it clear that in cases of misclassification where a firm and the Revenue have reached a settlement before 6 April 2024, the new rules would not be applied retrospectively meaning firms who settled before that date would be at a disadvantage. We now know the rules will be retrospectively applied so how does that change things? Earlier I spoke to tax expert Penny Simmons to get the low-down:
Penny Simmons: “Jeremy Hunt in his Autumn Statement, Joe, confirmed that the set-off mechanism is going ahead. I think the main point to take from this is that the Revenue has confirmed that in relation to settlement discussions that are currently ongoing at the moment, businesses should be able to pause them and if they're not offered a pause they should certainly be asking for a pause so that they don't conclude prior to April 2024 so that they are eligible to use the set-off mechanism. So for me that that would be the big thing to take note of.”
Joe Glavina: “We know the mechanism is coming in from April and that it’s going to be retrospective, Penny, so does that make life less complicated for end users?”
Penny Simmons: “I'm not sure I would say life is less complicated for end user businesses that have to apply the IR35 rules. The reality is that compliance with the rules hasn't changed and they still need to do exactly what they needed to do prior to the Autumn Statement. However, those that are currently facing a Revenue inquiry, which may involve a significant payment for underpaid employment taxes where a business had determined contractors as being outside the IR35 rules and therefore not subject to employment taxes, and the Revenue challenges those determinations and says that they were inside the IR35 rules and therefore employment taxes have been underpaid, there may now be an ability for a business to claim a reduction to the underpayment by way of this set-off mechanism and that could be a quite significant set off. It’s difficult to kind of give you any figures. It will depend on the businesses and how much tax is involved but the reality is the set-off, the ability to claim a set off, is good ne
Joe Glavina: “Finally, Penny what your message to HR viewers watching this in summary?”
Penny Simmons: “My message really is that compliance with IR35 is very, very important for businesses, particularly those that are engaging large numbers of payroll workers. Nothing has really changed. There is a good news story here in that businesses will be able to claim a set-off if they are facing a Revenue inquiry and are facing the need to make a payment to the Revenue for underpaid taxes. Now, that's good news but nothing has changed from a compliance perspective and we are still seeing the Revenue, increasingly, looking to raise inquiries with businesses regarding their IR35 compliance. Those inquiries can take the form of a simple kind of phishing letter – at least what we call a phishing letter - where they ask the business for information about their IR35 compliance or the number of PSC contractors that they work with. They may be sent a questionnaire, which looks like a simple questionnaire to fill in, and then once they fill that in the Revenue may raise more formal inquiries, or the Revenue may launch into a formal inquiry at the outset. The reality is that businesses need to ensure that they are fully compliant with the rules and that they have a secure audit trail to demonstrate compliance so that if they receive one of those letters, or the Revenue does launch an inquiry, that they can respond and demonstrate that they have fully complied with the IR35 rules and taken reasonable care in making determinations for contractors where appropriate.”
The background to this and details of how the set-off mechanism will work are set out in the government’s response to its earlier consultation which ran from 27 April to 22 June. That response paper has now been published and reflects what Jeremy Hunt said in Autumn Statement. We’ve put a link to it in the transcript of this programme for you.
- Link to response to consultation outcome: Off-payroll working (IR35) – calculation of PAYE liability in cases of non-compliance