The consultation period has ended, the final legislation has been laid before parliament, and the HMRC guidance has been issued. The new off-payroll working (IR35) ‘set-off’ rules take effect from 6 April 2024.
Why are the IR35 rules changing?
An issue with the IR35 off-payroll working rules in ITEPA 2003 Chapter 10 was the potential ‘double taxation’ of off-payroll workers. These workers, often operating via their own intermediaries (usually limited companies), were originally classified as ‘outside IR35’ but later reclassified as ‘inside IR35’.
This typically occurs when HMRC disagree with the end-user’s assessment of the off-payroll worker’s employment status, concluding that the worker is a deemed employee (i.e. inside IR35).
In such cases, the deemed employer (usually the party paying the worker’s intermediary, which could be the end-user themselves) is responsible for the tax, NIC and Apprenticeship Levy due on payments made to the intermediary.
Previously, there was no mechanism for setting-off any income tax, NIC and corporation tax paid by the worker/intermediary on the income from that off-payroll working engagement. This has resulted in both the deemed employer and the off-payroll worker/intermediary paying tax on this income (i.e. double taxation).
Workers or intermediaries could claim a repayment of the income tax, NIC, and corporation tax paid on the income which the deemed employer should have operated PAYE on. However, without a set-off mechanism, the deemed employer’s risks were heightened. It also disincentivised the use of off-payroll workers operating through their own intermediaries and created an unlevel playing field for sole traders who had such a mechanism available.
What is the position from 6 April 2024?
The new set-off rule, available from 6 April 2024, potentially addresses the above problems. It allows HMRC to offset certain taxes and NIC paid by the off-payroll worker/intermediary on payments the intermediary has received. These are subsequently treated as ‘deemed direct payments’ (as defined in Chapter 10), to be offset against that deemed employer’s liabilities.
This will apply from 6 April 2024 to deemed direct payments made on or after 6 April 2017.
This means the change can apply retrospectively. It should be noted that any cases regarded as final and conclusive or closed before 6 April 2024 will not be considered for a set-off.
For medium and large private sector end-users, where liabilities are assessed from 6 April 2024, the set-off will only apply from 6 April 2021. This is because the off-payroll working rules have only applied to such businesses from that date.
Are there conditions?
There must be a trigger event on or after 6 April 2024. In the draft legislation there were only three trigger events, now there are four, and one of these needs to be met. The trigger events are as follows:
HMRC must be able to identify the worker and the intermediary, meaning the deemed employer will need to provide certain information to HMRC. They must also establish that returns have been submitted and that relevant tax and NIC has been paid or assessed on the off-payroll working engagement by the worker/intermediary.
Once HMRC are satisfied that there is a trigger event; has identified the worker/intermediary; checked that returns have been submitted; and established that relevant tax and NIC has been paid, they will calculate the set-off and consider calculating and making a direction for the set-off.
Only certain taxes and NIC are included in the set-off calculation (notably, any employer NIC paid by the intermediary regarding the off-payroll working arrangement is excluded). Where HMRC cannot calculate an accurate figure, they will make a best estimate.
HMRC will issue a direction notice to the deemed employer, and to the workers and intermediaries included in the set-off (informing them of the amount of set-off relevant to them). The worker/intermediary has a right to appeal the direction notice within 30 days of its issue. There is no right of appeal for the deemed employer, although if the deemed employer disagrees with the set-off amount, they can challenge the calculation with HMRC if they have supporting information.
Conclusion
These are welcome and sensible changes that should reduce risks for businesses and public sector organisations using off-payroll workers operating through their own intermediaries. However, the changes are not perfect as there is no guarantee for deemed employers that a set-off will be available. Even where it is available, it will not mitigate the deemed employer’s liabilities completely and can also be appealed by workers/intermediaries.
Businesses and organisations should still implement robust policies and processes to maintain compliance with off-payroll working rules.
David Williams-Richardson & Lee Knight, RSM
The consultation period has ended, the final legislation has been laid before parliament, and the HMRC guidance has been issued. The new off-payroll working (IR35) ‘set-off’ rules take effect from 6 April 2024.
Why are the IR35 rules changing?
An issue with the IR35 off-payroll working rules in ITEPA 2003 Chapter 10 was the potential ‘double taxation’ of off-payroll workers. These workers, often operating via their own intermediaries (usually limited companies), were originally classified as ‘outside IR35’ but later reclassified as ‘inside IR35’.
This typically occurs when HMRC disagree with the end-user’s assessment of the off-payroll worker’s employment status, concluding that the worker is a deemed employee (i.e. inside IR35).
In such cases, the deemed employer (usually the party paying the worker’s intermediary, which could be the end-user themselves) is responsible for the tax, NIC and Apprenticeship Levy due on payments made to the intermediary.
Previously, there was no mechanism for setting-off any income tax, NIC and corporation tax paid by the worker/intermediary on the income from that off-payroll working engagement. This has resulted in both the deemed employer and the off-payroll worker/intermediary paying tax on this income (i.e. double taxation).
Workers or intermediaries could claim a repayment of the income tax, NIC, and corporation tax paid on the income which the deemed employer should have operated PAYE on. However, without a set-off mechanism, the deemed employer’s risks were heightened. It also disincentivised the use of off-payroll workers operating through their own intermediaries and created an unlevel playing field for sole traders who had such a mechanism available.
What is the position from 6 April 2024?
The new set-off rule, available from 6 April 2024, potentially addresses the above problems. It allows HMRC to offset certain taxes and NIC paid by the off-payroll worker/intermediary on payments the intermediary has received. These are subsequently treated as ‘deemed direct payments’ (as defined in Chapter 10), to be offset against that deemed employer’s liabilities.
This will apply from 6 April 2024 to deemed direct payments made on or after 6 April 2017.
This means the change can apply retrospectively. It should be noted that any cases regarded as final and conclusive or closed before 6 April 2024 will not be considered for a set-off.
For medium and large private sector end-users, where liabilities are assessed from 6 April 2024, the set-off will only apply from 6 April 2021. This is because the off-payroll working rules have only applied to such businesses from that date.
Are there conditions?
There must be a trigger event on or after 6 April 2024. In the draft legislation there were only three trigger events, now there are four, and one of these needs to be met. The trigger events are as follows:
HMRC must be able to identify the worker and the intermediary, meaning the deemed employer will need to provide certain information to HMRC. They must also establish that returns have been submitted and that relevant tax and NIC has been paid or assessed on the off-payroll working engagement by the worker/intermediary.
Once HMRC are satisfied that there is a trigger event; has identified the worker/intermediary; checked that returns have been submitted; and established that relevant tax and NIC has been paid, they will calculate the set-off and consider calculating and making a direction for the set-off.
Only certain taxes and NIC are included in the set-off calculation (notably, any employer NIC paid by the intermediary regarding the off-payroll working arrangement is excluded). Where HMRC cannot calculate an accurate figure, they will make a best estimate.
HMRC will issue a direction notice to the deemed employer, and to the workers and intermediaries included in the set-off (informing them of the amount of set-off relevant to them). The worker/intermediary has a right to appeal the direction notice within 30 days of its issue. There is no right of appeal for the deemed employer, although if the deemed employer disagrees with the set-off amount, they can challenge the calculation with HMRC if they have supporting information.
Conclusion
These are welcome and sensible changes that should reduce risks for businesses and public sector organisations using off-payroll workers operating through their own intermediaries. However, the changes are not perfect as there is no guarantee for deemed employers that a set-off will be available. Even where it is available, it will not mitigate the deemed employer’s liabilities completely and can also be appealed by workers/intermediaries.
Businesses and organisations should still implement robust policies and processes to maintain compliance with off-payroll working rules.
David Williams-Richardson & Lee Knight, RSM
