What HMRC’s IR35 offset-offer means for off-payroll contractors, and clients

Off-payroll working legislation – being the complicated tax issue that it is – unsurprisingly has an unwanted ‘double taxation’ side-effect, writes Nikola Nowak, tax consultant at Markel.

How HMRC probes, then tots-up

How come such a side-effect? Well, under Chapter 10 Part 2 ITEPA 2003 legislation, HMRC would investigate the end-client (as the IR35 status decision maker) and should the department conclude that the client applied the legislation incorrectly, HMRC would estimate PAYE liability based on the gross payments made to the worker. But this calculation would not take into account the taxes already paid by the contractor.

The limited company position

During the natural course of business, however, the contractor’s PSC would have paid corporation tax and the worker would have paid income tax and NICs on the income received from that engagement.

Whichever way funds are withdrawn from the limited company, there will undoubtedly be tax paid on it.

Yet currently, HMRC does not have the power to offset any tax payments made by the contractor, in relation to the engagement in question against the tax bill of the ‘deemed employer.’ Instead, the process involves HMRC carrying out the entire enquiry to completion, collecting the additional taxes (plus interest and penalties) from the client, and then notifying the contractor that they are due a refund.

Too much tax

Of course, this relies on the Revenue having the correct contact information in the first place, and quite frankly, the process as a whole is of no use to the party liable during the enquiry. Where HMRC is not able to source reliable contact information from the client, they will not issue a refund to the contractor – in which case HMRC has collected too much tax.

And should almost go without saying, but these repayments are also subject to time limits which means if the contractor is too late to the party, they will miss out.

A boost for deemed employers, but no refunds for contractors

The mechanism proposed by HMRC’s consultation (which closed on June 22nd 2023) to alleviate this issue would allow corporation tax, income tax and NICs and any tax paid on dividends to be offset against the client’s PAYE liability. In some cases, this could significantly lower the final tax bill for the deemed employer.

This means, though, there will be no refund due to the contractor.

Logically, while it might feel unfair if you’re a contractor, it makes sense. If the worker were a true employee, the tax burden would be on both the employer and the employee – extending this way of reasoning, there is no reason for the PSC to be eligible for a refund of their corporation tax.

With this new offset mechanism pencilled in to come into play from April 6th 2024, it was confirmed by the ICAEW, following reporting by ContractorUK, that HMRC is offering organisations under off-payroll enquiry, and at settlement stage, the opportunity to pause until the offset provision is in place.

Pause criteria

Yet be aware, HMRC has emphasised to deemed employers that its officials will only agree to a “pause” if certain conditions are met, these include:

· you’ve acknowledged in writing an error in applying the off-payroll working rules

· the deemed employer’s gross liability, including any penalty, has been agreed.

· you give us the information we need to work out a set-off. This is:

-- the Personal Service Company’s name and Company Registration Number

-- the worker’s full name or National Insurance Number.

Offer, indemnities, and assurance

It should be noted that while this offer, of sorts by HMRC, will undoubtedly alleviate some of the administrative burdens, there is no offset for both Employer’s National Insurance paid by the contractor or for tax and NI payments to other employees/shareholders who aren’t part of the service supply chain.

Last but absolutely not of least importance -- for the past two years we have seen an increase in tax and NIC indemnity clauses within contracts between PSCs and recruitment agencies, and also with end-clients where the engagement is direct.

Though we cannot be certain how enforceable these indemnity clauses are, it is clear that end-clients are anxious to ensure that any potential future tax liabilities are covered by the contractor -- in full. The offset mechanism could mean that clients may now rest assured that it won’t be their organisation left to foot the entire bill on their own. Even then, this will not remove the HMRC liability in full, and there will most likely still be remaining tax, interest and penalties left to pay.