Timing issue with long awaited IR35 set-off mechanism

As you may be aware, the government is consulting on reforms to the IR35 off-payroll working legislation to address tax overpayments where incorrect worker status determinations have been made. They want to bring in a new set-off mechanism which would operate more fairly, especially to end users who can face unexpectedly high tax bills from the Revenue. It’s a welcome development but there’s an issue with the timing. We’ll speak to a tax specialist about that issue. 

Personnel Today sets out the background to this. Under the current regime, if an organisation, typically the hirer, is found to have made errors when determining the employment status of its off-payroll workers, it becomes liable for the income tax and national insurance contributions (NICs) that should have been deducted. The Revenue may end up collecting more tax than is due because the 
worker and their intermediary could have already paid in the belief that they were outside the rules.  

To address that double taxation issue, the Revenue have a notification process whereby after a successful IR35 status challenge which results in the deemed employer settling a PAYE and NIC liability, the Revenue will inform individual workers and PSCs of their entitlement to claim a refund for the corporation tax and income tax they have already paid on the same income. Whilst this prevents a double tax charge, the Revenue accepts that this results in ‘the deemed employer bearing all of the costs of the worker’s tax burden, with the worker bearing none of it’. It’s evidently unfair because if the business had applied the IR35 rules correctly, the worker would have had employment taxes and their NICs deducted through the PAYE system before receiving payment. The new mechanism being proposed would lead to a more equitable sharing of the tax burden between the worker and the deemed employer. It would allow for offsetting tax and NICs already paid in respect of the worker against the tax and NIC liabilities assessed on the deemed employer.

As for the timing, the new set-off mechanism is expected to be introduced from April 2024. However, the consultation says that where an organisation and the Revenue have reached a settlement before 6 April 2024, the new policy would not be applied retrospectively. On that point, Susan Ball, employment tax partner at RSM UK and president of the Chartered Institute of Taxation is quoted in Personnel Today saying how organisations currently under scrutiny by HMRC could be tempted to drag their heels until any change takes effect next April. She says: “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 fact the rules are not retrospective is point flagged by tax specialists Penny Simmons and Steve Porter in their Out-Law article: ‘New IR35 tax set-off mechanism should be retrospective, say experts’. Penny says: ‘it is disappointing that the new rules are not expected to have retrospective effect, since the lack of a set-off mechanism is already proving problematic for businesses.”

So, let’s hear more about that. Earlier Penny joined me by video-link to discuss the proposed set-off mechanism. I put it to Penny that faced with that given some clients are already in discussions with the Revenue, and 6 April is some time off, they have a tricky bridge to cross: 

Penny Simmons: “It is a tricky bridge to cross and, ultimately Joe, that's why in our response to the consultation that closes on the 22nd of June we suggested that the measures be introduced with retrospective effect so that even if you reach a settlement with the Revenue today, next year, when the rules are introduced, you'd be able to claim that set-off. How do you deal with that? You bear it in mind, you watch the consultation, you watch the progress of the legislation, and be alive to the fact that the consultation, and potential changes to the rules allowing for set-off, are being discussed and are going to be introduced?”

Joe Glavina: “Susan Ball talks about some businesses, who are already in negotiations with the Revenue, being tempted to drag their heels so they get the benefit of the new rules next April. Do you think this consultation will affect behaviour in that way?”  

Penny Simmons: “No, I wouldn't say that this consultation is necessarily having an impact whereby it's going to affect a business's strategic decisions as to how it engages with off-payroll workers and whether it chooses to engage with off-payroll workers through personal service companies such that the IR35 rules would apply. I would say it is much more relevant when businesses are looking back at their compliance and where they may be finding areas where they weren't as compliant with the rules as they would be, that they could look to set-off taxes that have been paid already, PAYE taxes that have already been paid by those off-payroll workers and their personal service companies. So, I don't expect this to have an effect on a business's strategy as to how it manages its off-payroll workers. This is more about what's happened in the past, and what the actual tax position is likely to be going forward.”

Joe Glavina: “I see one or two of the articles out there are putting a figure on the level of savings for end users when the new set-off comes in. They say around 75%. Is that accurate?”

Penny Simmons: “It's very difficult to give you numbers and percentages and, obviously, I haven't seen the working behind that 75%, how they got to that 75%. The reality is that if a business is in discussions with HMRC and knows that HMRC considers the workers should have been paid within the IR35 rules and therefore taxes deducted at source, so taxes deducted through the PAYE system before the worker was paid, and the business didn't apply the rules in that way, so applied the rules whereby the work was outside the IR35 rules and taxes weren't deducted at source, then the business can calculate exactly how much tax it would it should have spent, so what taxes are at stake, and then you're looking at what taxes would have been paid by the worker through the PAYE system or through its personal service company on the basis that it was outside the I35 rules and you're looking to, if you like, deduct the amount of tax paid by the worker from the tax that would have been paid by the business if it had taxed the worker as though they were inside the IR35 rules. So, it's that difference that you're looking at, and the saving.”

Joe Glavina: “Anything else to add to that Penny? Any message for viewers?”

Penny Simmons: “Not really, Joe. I mean, the only thing I'd say is the consultation closes on the 22nd of June. If the set-off mechanism affects you, if you have opinions about this, then businesses should always be encouraged to reply, to make a response to the consultation. It’s relatively easy to do, you can just send a response online, the email address will be on the consultation and like I said earlier in the programme, really bear in mind the fact that this consultation has been opened, it's happened, and the government are looking to change the rules to allow a set-off mechanism. So, bear in mind that this is coming - we're fairly certain that this is coming - it's just when it will actually be introduced from and, like I said, we have suggested and recommended in our response that it's introduced retrospectively so doesn't just take effect from April next year.”

As Penny said, that consultation closes on 22 June. If you want to respond to it, you can - Section 8 gives details of how to do that – there’s an email address specifically for that purpose and that’s the best option given that deadline is fast approaching. We’ve put a link to the consultation paper in the transcript of this programme.

LINKS
- Link to consultation: ‘Off-payroll working (IR35) – calculation of PAYE liability in cases of non-compliance’
- Link to Out-Law article: ‘New IR35 tax set-off mechanism should be retrospective, say experts’