The Off-Payroll Working Rules are currently under consultation to change how HMRC account for taxes already paid by an individual and/or their intermediary when calculating Pay As You Earn liability due by a deemed employer where an error has been made applying the off-payroll working rules.
Impact of Off-Payroll Working Rules on Tax Calculations
The purpose of the consultation is to address the issue of double taxation by the HMRC, and how this would affect different parties in the supply chain.
The HMRC may undertake a compliance check to see if the off-payroll rules have been applied correctly to contract engagements. If it is found that the engagement was incorrectly determined, the deemed employer will become liable to pay the Income Tax and National Insurance Contributions that should have been deducted under PAYE had the correct determination originally been made.
Current Legislation and Overpayment of Taxes
As the rules currently stand, if this occurs after the worker and their intermediary have filed their Income Tax Self Assessment return and Company Tax return for that year, they may have already paid some Corporation Tax, Income Tax and/or National Insurance Contributions on that income. This may result in the HMRC collecting too much tax and National Insurance Contributions on the off-payroll income overall. Under current legislation, the worker and their intermediary would be entitled to claim a repayment for any tax they have overpaid in relation to this income, subject to time limits and conditions.
Alternatively, if the error is discovered and corrected before the worker and their intermediary have filed their tax returns, there would be no overcollection of tax and National Insurance Contributions. Any Self Assessment return and Company Tax return would be submitted as if the engagement had been classified inside the rules, with the correct tax and NICs paid.
Proposed Mechanism for Tax Set-Off
Currently, where a worker is engaged through their own PSC, the legislation does not allow HMRC to set off taxes already paid by the worker or their PSC against a deemed employer’s subsequent PAYE liability (a ‘set-off’). To address this, HMRC is considering whether to allow for such a mechanism for off-payroll working purposes.
The HMRC will use assumptions and best judgement to estimate the amount of tax paid by a worker and their intermediary that represents tax paid on off-payroll working income. Assumptions may include determining the amount of personal allowance available, the apportionment of business expenses, whether there are other sources of income (such as other off-payroll working engagements, investment income or property income), distributions to other shareholders, any other available reliefs, as well as other factors. Where appropriate, HMRC would use relevant tax return data to inform its assumptions and estimates but may also rely on historic patterns of behaviour and tax receipts. The HMRC should explain any assumptions and best judgement to the deemed employer.
Appeal Process for Direction Notices
The worker and their intermediary would have a right to appeal against the direction notice on specific grounds. For example, they would be able to appeal on the grounds that the information contained in the direction notice is incorrect, such as:
The worker or their intermediary did not receive a payment from that deemed employer in the tax year or accounting period specified in the direction notice
The amount of the tax and NICs to be set off is incorrect, possibly as a result of a change in tax affairs since the direction notice was issued
The worker or their intermediary would not be able to appeal a direction notice on the basis that they disagree with HMRC’s conclusion regarding the status of the worker.
The worker or their intermediary would have 30 days from the date the direction notice is issued to appeal. If they do not appeal within this time limit, the direction will be treated as agreed and the deemed employer’s PAYE liability will be reduced by the amount of the set-off.
Industry Reactions and Feedback
The changes to the Off-Payroll rules have been received positively, with Shazia Imtiaz, General Counsel at APSCo commenting:
“We welcome the recognition from HMRC that provisions are needed to allow any PAYE liability to be recovered from the deemed employer to be reduced by the taxes already paid by the worker. As we’ve previously highlighted, there are flaws within existing legislation that could see recruiters unfairly penalised financially. The introduction of a set off mechanism will correct the current unfairness and inequity caused by the over payment of tax where there has been an error in applying off-payroll working. APSCo has long lobbied for a set off mechanism to protect against this issue. We shall submit our detailed comments to HMRC’s technical consultation representing the views of our members in the professional staffing sector.”
Contact Us for More Information
If you have any queries surrounding the changes to the Off-Payroll Working Rules, please feel free to reach out to us at Gerrard White where we will be more than happy to discuss our services and solutions in relation to IR35.
