The draft statutory instrument and the draft HMRC guidance relating to such mechanism has now been released for technical consultation.
From the 6 April 2021, transformative changes were made to the off-payroll working rules, commonly referred to as the IR35 regime. The Autumn Statement 2023 announced that an offset mechanism was to be introduced to allow HMRC to reduce the liability of the Fee-Payer to account for taxes already paid by an individual and/or their PSC on payments received. The draft statutory instrument for, and the draft HMRC guidance relating to, such mechanism has now been released for technical consultation.
IR35 regime to date
The IR35 regime applies where an individual provides their services (directly or indirectly) through a personal service company or other qualifying intermediary (PSC) to another person or entity (an End-User) in circumstances where, had the individual provided their services directly to the End-User rather than through their PSC, they would have been an employee (or office-holder) of the End-User. Under the revised regime, the End-User has an obligation to determine whether the arrangements involving the individual are one of deemed employment and, usually, it will then be for the party in the contractual chain which makes payments to the PSC (the Fee-Payer) to include the individual on their payroll and account for the relevant PAYE and national insurance liabilities on the payments made to the PSC.
Where an arrangement has incorrectly been determined not to be one of deemed employment, the Fee-Payer will not have accounted for the relevant PAYE and national insurance on the payments made to the PSC but will nevertheless remain liable for such. In practice, it is likely that the PSC and/or the individual would have already accounted for some corporation tax, income tax and/or national insurance on (or by reference to) such payments.
Currently, there is no mechanism for the liabilities of the Fee-Payer in these circumstances to be adjusted to take into account any tax or national insurance which may have already been accounted for by the PSC or the individual on such payments. Instead, the PSC and/or the individual would be able to seek to reclaim the liabilities they had already paid from HMRC, and the Fee-Payer’s only recourse would be to seek recovery of the liabilities from the PSC under any contractual indemnities.
Introducing an offset mechanism
Broadly, the proposed mechanism works such that where:
on or after 6 April 2024 either (i) HMRC serve a determination or (ii) receive a settlement offer, in respect of a relevant liability under the IR35 regime;
income tax, corporation tax and/or employee national insurance contributions have been paid or assessed in respect of a payment received in respect of the liability; and
HMRC are in receipt of a tax return (from the individual or their PSC) which includes such liabilities, then, HMRC can direct that the liability of the Fee-Payer (or other relevant deemed employer) be reduced by the income tax, corporation tax and/or employee national insurance already accounted for.
The amount of the reduction shall be HMRC’s ‘best estimate’ of the income tax, corporation tax and/or employee national insurance already paid or assessed. The individual and their PSC would then also lose the ability to seek to reclaim the same liabilities from HMRC.
The mechanism will not apply to any liability of the Fee-Payer (or other relevant deemed employer) to account for employer national insurance, and the mechanism gives the individual and their PSC a right to appeal any direction that a reduction is given (broadly, on the grounds that: (i) they did not receive the ‘deemed employment’ payments; (ii) no tax has been paid on the ‘deemed employment’ payments; or (iii) the tax treated as having been paid on the ‘deemed employment’ payments it incorrect).
In order for any reduction to be applied, it will need to be established that income tax, corporation tax and/or employee national insurance have already been paid or assessed and that such amounts in fact relate to the relevant ‘deemed employment’ payments. Draft guidance on this suggests that HMRC will adopt a sensible approach to this task, for example using the relevant tax returns they have to hand. However it is also clear that if HMRC cannot identify, or are not able to estimate, an amount of income tax, corporation tax and/or employee national insurance paid by the individual or the PSC on the relevant ‘deemed employment’ payments, no reduction will be given. It will remain to be seen how vigorously and forensically HMRC undertake this exercise, and it will be interesting to see how frequently HMRC cite identification or estimation issues as reasons for not allowing any reduction.
Next steps
Whilst welcome, given some of the uncertainties in how the mechanism could be applied in practice, it is recommended that End-Users and Fee-Payers continue to ensure that they obtain robust contractual protection for tax and national insurance risk under the IR35 regime, along with other contractual protections relevant to the successful operation of the mechanism.
Home >Articles > IR35: consultation on the offset mechanism
IR35: consultation on the offset mechanism
The draft statutory instrument and the draft HMRC guidance relating to such mechanism has now been released for technical consultation.
From the 6 April 2021, transformative changes were made to the off-payroll working rules, commonly referred to as the IR35 regime. The Autumn Statement 2023 announced that an offset mechanism was to be introduced to allow HMRC to reduce the liability of the Fee-Payer to account for taxes already paid by an individual and/or their PSC on payments received. The draft statutory instrument for, and the draft HMRC guidance relating to, such mechanism has now been released for technical consultation.
IR35 regime to date
The IR35 regime applies where an individual provides their services (directly or indirectly) through a personal service company or other qualifying intermediary (PSC) to another person or entity (an End-User) in circumstances where, had the individual provided their services directly to the End-User rather than through their PSC, they would have been an employee (or office-holder) of the End-User. Under the revised regime, the End-User has an obligation to determine whether the arrangements involving the individual are one of deemed employment and, usually, it will then be for the party in the contractual chain which makes payments to the PSC (the Fee-Payer) to include the individual on their payroll and account for the relevant PAYE and national insurance liabilities on the payments made to the PSC.
Where an arrangement has incorrectly been determined not to be one of deemed employment, the Fee-Payer will not have accounted for the relevant PAYE and national insurance on the payments made to the PSC but will nevertheless remain liable for such. In practice, it is likely that the PSC and/or the individual would have already accounted for some corporation tax, income tax and/or national insurance on (or by reference to) such payments.
Currently, there is no mechanism for the liabilities of the Fee-Payer in these circumstances to be adjusted to take into account any tax or national insurance which may have already been accounted for by the PSC or the individual on such payments. Instead, the PSC and/or the individual would be able to seek to reclaim the liabilities they had already paid from HMRC, and the Fee-Payer’s only recourse would be to seek recovery of the liabilities from the PSC under any contractual indemnities.
Introducing an offset mechanism
Broadly, the proposed mechanism works such that where:
on or after 6 April 2024 either (i) HMRC serve a determination or (ii) receive a settlement offer, in respect of a relevant liability under the IR35 regime;
income tax, corporation tax and/or employee national insurance contributions have been paid or assessed in respect of a payment received in respect of the liability; and
HMRC are in receipt of a tax return (from the individual or their PSC) which includes such liabilities, then, HMRC can direct that the liability of the Fee-Payer (or other relevant deemed employer) be reduced by the income tax, corporation tax and/or employee national insurance already accounted for.
The amount of the reduction shall be HMRC’s ‘best estimate’ of the income tax, corporation tax and/or employee national insurance already paid or assessed. The individual and their PSC would then also lose the ability to seek to reclaim the same liabilities from HMRC.
The mechanism will not apply to any liability of the Fee-Payer (or other relevant deemed employer) to account for employer national insurance, and the mechanism gives the individual and their PSC a right to appeal any direction that a reduction is given (broadly, on the grounds that: (i) they did not receive the ‘deemed employment’ payments; (ii) no tax has been paid on the ‘deemed employment’ payments; or (iii) the tax treated as having been paid on the ‘deemed employment’ payments it incorrect).
In order for any reduction to be applied, it will need to be established that income tax, corporation tax and/or employee national insurance have already been paid or assessed and that such amounts in fact relate to the relevant ‘deemed employment’ payments. Draft guidance on this suggests that HMRC will adopt a sensible approach to this task, for example using the relevant tax returns they have to hand. However it is also clear that if HMRC cannot identify, or are not able to estimate, an amount of income tax, corporation tax and/or employee national insurance paid by the individual or the PSC on the relevant ‘deemed employment’ payments, no reduction will be given. It will remain to be seen how vigorously and forensically HMRC undertake this exercise, and it will be interesting to see how frequently HMRC cite identification or estimation issues as reasons for not allowing any reduction.
Next steps
Whilst welcome, given some of the uncertainties in how the mechanism could be applied in practice, it is recommended that End-Users and Fee-Payers continue to ensure that they obtain robust contractual protection for tax and national insurance risk under the IR35 regime, along with other contractual protections relevant to the successful operation of the mechanism.
