HMRC launches IR35 offset consultation, to stop ‘double taxation’

The Association of Professional Staffing Companies was right to predict to ContractorUK that the government will seek views on the ‘IR35 offset issue’ sooner rather than later.

Publishing an eight-part consultation yesterday, HMRC said it would like feedback between now and June 22nd on the introduction of an offset mechanism into the off-payroll rules.

'Set-off'

While views on changes to the rules as a whole aren’t invited, the “set-off” will be given against the deemed employer income tax liabilities and the worker employee NIC deductions.

The set-off will potentially work in a similar manner to existing provisions in the PAYE Regulations 2003, which allow the setting off of taxes already paid in certain circumstances.

Eight objectives and 10 questions are open for response, so HMRC can receive “views on the policy before deciding on the best way to address the issue,” ideally as soon as April 6th 2024.

'Deficiency in the off-payroll working rules'

“Double taxation of the same income is a well-known deficiency in the off-payroll rules,” says Brookson’s Matt Fryer, aware of no such acknowledgement in the HMRC consultation.

“So it’s welcome that HMRC has finally published a consultation on this issue…[which the consultation says] should hopefully result in changes…from April 6th 2024.”

Status adviser Rebecca Seeley Harris agrees that fixing the fact that “HMRC may end up collecting more tax than is due,” as the consultation tentatively puts it, is long overdue.

'About time'

“About time is what I say,” she said of the consultation to ContractorUK. “Both myself and Qdos’s Seb Maley approached HMRC about the question of the offset back in 2020.

“Although we’ve all known about it since 2017, for the last few years, HMRC has just said ‘there is no offset’ despite it effectively being double-taxation. I’m glad it is consulting.”

In a statement, Mr Maley confirmed that Whitehall has known that HMRC doesn’t factor in tax already paid by the contractor on an IR35 non-compliant engagement for “some time.”

'Game-changing'

“I’m amazed that the government has refused to look into this until now,” Qdos’s boss said yesterday, welcoming the consultation.

“Westminster knew this was a problem…but has done nothing…[so the consultation] is potentially game-changing…[as] it’s an issue which can and should be solved relatively easily.”

ReLegal Consulting, founded by Seeley Harris isn’t so sure, telling ContractorUK that it doesn’t “actually think there is an easy solution” to the IR35 offset issue.

'Compromise is likely required'

HMRC may have reservations too, cautioning in the consultation that “a solution to this issue may not achieve all of the [eight] objectives, and some compromise is likely to be required.”

For now, the Revenue proposes that the different taxes and classes of NICs that would be included as part of a set-off would include corporation tax, paid by a worker’s PSC on the income from the off-payroll working engagement.

Income tax and employee NICs paid on a salary to the worker from the worker’s intermediary would also be included, as would Class 2/4 NICs -- where the intermediary is a partnership or another individual.

HMRC also proposes the set-off to cover tax paid on dividends received by a worker from the PSC, where the dividends are paid out of income from the off-payroll working engagement.

'Not fit for purpose'

Yesterday, APSCo said it welcomed the offset consultation, but signalled that if the hard-working contractor is who HMRC wants to help, there’s much more that could be done.

“We remain firm in our belief that even with this offset, the rules as they are currently written are not fit for purpose in the modern world of work,” said APSCo’s Tania Bowers.

“Given the level of off-payroll receipts reported by the OBR last month, it is highly likely that many genuinely self-employed professionals are being forced to work via payroll due to clients’ over cautious approach of assessing assignments as inside IR35.”

'Prefer to see IR35 removed'

Encouraging the government to go further still -- now it’s shown its willingness to consult on the April 6th 2017/2021 framework’s offset issue, is IPSE’s Andy Chamberlain.

“We welcome the consultation and support the aim to ensure fairer distribution of IR35 liabilities through the supply chain [although] we would of course much prefer to see IR35 removed completely”.

Policy director at the Association of Independent Professionals and the Self-Employed, Mr Chamberlain also told ContractorUK last night:

“We hope this measure – if implemented [from April 6th 2024] – will give clients more confidence to accurately assess status rather than continuing with blanket assessments and blanket bans, which have made running a business impossible for thousands of genuine contractors.”

'Unpick'

In the consultation, HMRC says legislation would be introduced to share the income tax and NICs liability between the client and the worker, by estimating a set-off for tax and NICs already paid by the worker and their intermediary.

“It is interesting to consider why HMRC have not sought to address this issue sooner,” says Brookson’s Mr Fryer, the People 2.0 company’s managing director.

In a statement he also told ContractorUK: “I suspect this [inaction from HMRC to date] is to do with the rollout of their compliance and enforcement activity which is now well underway. And therefore HMRC has focussed its attention on how best to unpick the tax position when errors are uncovered. 

“The timing of this consultation is a reminder that the off-payroll rules are actively being enforced, and businesses should therefore ensure that their systems and processes are robust.”

'Immoral'

To others, it’s a reminder that the taxman’s updated IR35 frameworks are flawed, otherwise a consultation to fix the offset issue – which both the NAO and the PAC have raised concerns about – wouldn’t be needed at all.

“HMRC not offsetting tax already paid by a contractor when issuing an IR35 bill to a business is as illogical as it is immoral,” says Qdos operations director Nicole Slowey. “[So] this [consultation] is long overdue. Consulting on the issue is one step closer to the problem being solved.”