Contractors, will you speak up about the IR35 set-off, as HMRC is asking you to?

A new HMRC document with the not exactly snappy title, ‘Calculating PAYE liabilities in cases of non-compliance for off-payroll working’ lists PSC contractors as the first of four taxpayer groups invited to respond, writes David Harmer of Markel Tax.

Don't delay

In short, HMRC has opened a consultation into the set-off mechanism for off-payroll legislation and limited company contractors can contribute. This consultation follows on from the brief - though welcomed by many - confirmation in Jeremy Hunt’s Autumn Statement 2023 that the IR35 set-off will apply from April 6th 2024.

While we are all no doubt grateful of the opportunity to have our say on these changes to tax legislation, this consultation opened on January 25th – and it closes on February 22nd. So HMRC is affording stakeholders just a single month to respond. From today, it’s worse -- you’ve got just over two weeks to speak up about the set-off.

Draft legislation – Regulation 72GB

We now need to get a bit technical. The proposed secondary legislation offers a mechanism by which taxes already paid by a worker and their intermediary (PSC, partnership or another individual) in the usual course of their business, can be offset against the deemed employer’s total PAYE liability, during an enquiry under the Chapter 10 ITEPA rules.

The draft legislation shows the suggested wording to be inserted into Part 4 of ITEPA 2003, and this change is due to come into force from April 6th 2024.

Other than those open enquires where a deemed employer has acknowledged and accepted tax and NIC liabilities, and has satisfied HMRC by meeting certain criteria, allowing HMRC to pause the enquiry until the legislation is enacted, this will apply to determinations made by HMRC on or after April 6th 2024.

It is worth noting that there will be no change to NICs legislation, as the Social Security Contributions Regulations 2001 already include Regulation 51 – a provision by which HMRC is able to account for NICs which have been assessed incorrectly.

Draft HMRC guidance (now shows what the set-off will look like)

Three draft updates to the Employment Status Manuel published on HMRC’s website begin to deal with the logistics of the OPW/ IR35 set-off.

In particular, ESM10037 shows us a snippet of the anticipated process:

• Client or deemed employer to provide relevant worker/intermediary information
• HMRC identify worker and intermediary, where possible
• HMRC to identify whether relevant tax returns have been submitted
• HMRC to identify an amount of tax/NICs paid or assessed by the worker or intermediary
• HMRC to calculate, where appropriate, an amount of set-off, and provide the deemed employer with a revised liability
• HMRC will notify the worker or intermediary of the outcome and restrict reliefs on the same tax

The draft ESM guidance confirms that the worker, the intermediary and the deemed employer will receive direction notices which confirm the amounts offset against the final PAYE liability.

Then, ESM10039 confirms that the worker and the intermediary have the right to appeal against a direction notice.

Contractor appeals to be confined to the Reg 80 determination

However the deemed employer can only appeal the Regulation 80 determination. There are specific grounds on which a worker/intermediary can appeal the direction notice; if these don’t apply, the appeal will not stand.

Helpfully, ESM10038 tells us more about which specific taxes can be offset, and which cannot be included. For example, though it is unlikely in many cases that a PSC will have paid any in the first place, Secondary Class 1 NICs are not applicable for offset.

Anti-abuse provisions built in…

The guidance also confirms that there will be a mechanism in place to prevent the intermediary and the worker from claiming back any repayments from HMRC once the taxes have been ‘used’ against the deemed employer’s PAYE liability.

Of course, the set-off can only be in relation to taxes resulting directly from the engagement which was incorrectly assessed by the deemed employer, and only in relation to the individual working on the engagement.

Introducing HMRC’s ‘best estimate’

It is interesting to see that unless HMRC is able to establish an accurate amount of tax and NICs that has been paid or assessed for the set-off, the department will use “best estimate” figures based on tax returns submitted by the individual and their intermediary. This means that if returns are missing or inaccurate, this could affect the set-off value.

In circumstances where the deemed employer is unable to provide enough information about the worker and the intermediary for HMRC to identify both, the off-set will not be available at all.

Whether you are an agency, end-client or a PSC, we recommend you familiarise yourself with the draft legislation and draft ESM guidance – all viewable via the consultation page.

Get involved

If you feel that anything has been missed or requires amendments, you are encouraged to respond to the consultation (there is an email address provided where responses can be sent to).

Remember, the purpose of this set-off mechanism is in the interest of fairness and avoiding double taxation which, of course, is always a good thing.

Without sounding too pessimistic (because I agree that HMRC is at risk of over-collecting tax in some circumstances), adding more steps into the enquiry process and making the legislation more complex leaves exposure to human error and potentially administrative burdens.

Nonetheless, we suspect that the legislation will plough on ahead as it is. Watch this space for any further updates – though with planning underway by HMRC and no doubt stakeholders too, hopefully we won’t see any flip-flop repeals on March 6th!