Closed consultation

Technical consultation on draft secondary legislation for off-payroll working (IR35): calculating PAYE liabilities in cases of non-compliance

Published 25 January 2024

Introduction

The off-payroll working rules (commonly known as IR35) set out that where an individual is working like an employee, they should pay tax like an employee – regardless of whether they are working through their own intermediary (for example, a personal service company (PSC)).

The rules aim to ensure fairness within the tax system by addressing the issue of people working like employees but through an intermediary simply to avoid paying employment taxes.

Under reforms to these rules in 2017 and 2021, the client engaging the worker is responsible for determining the employment status of the worker, and for ensuring the right tax and National Insurance is paid to HM Revenue and Customs (HMRC).

If the client is found by HMRC to have incorrectly determined its off-payroll worker to be self-employed for tax purposes, when they should have been treated as an employee, the deemed employer (which could be the client or an agency further down the labour supply chain) becomes liable for Income Tax and National Insurance contributions (NICs) that should have been deducted from the fee paid to the off-payroll worker had the correct status determination been made.

In this situation, HMRC may end up collecting more tax than is due because the worker and their intermediary may have already paid tax and NICs on the same income in the belief that they were outside the rules.

This over-collection scenario may also occur in a situation where an officer of HMRC considers there is no prospect of recovery of the PAYE liability from the deemed employer, and issues a recovery notice on a relevant person instead.

The government launched a consultation on 27 April 2023 seeking views on a potential legislative change to allow HMRC to account for tax and NICs already paid by a worker and their intermediary against the deemed employer’s Pay As You Earn (PAYE) liability. Following feedback on this consultation, the government announced at Autumn Statement on 22 November 2023 that this legislative change would be introduced from 6 April 2024.

Following this, a new power has been inserted into the Income Tax (Earnings and Pensions) Act 2003 by virtue of Clause 17 of Finance Bill 2023. This bill was introduced into parliament on 27 November 2023.

This power allows regulations to be made to treat amounts of tax already assessed or paid by the worker and their intermediary as paid in respect of a PAYE liability due under the off-payroll working rules. The PAYE liability that is recovered from the deemed employer will then be reduced by these amounts.

The draft statutory instrument published for consultation alongside this technical note contains detailed provisions to be introduced in the Income Tax (Pay As You Earn) Regulations 2003 to allow this recovery, along with the conditions under which it can apply, the mechanics of the recovery and the appeal rights associated with it.

Who should read this?

People who work through their own intermediary (for example, a PSC). Medium and large-sized clients, public authorities, agencies, partnerships and individuals who engage people who work through their own intermediaries. Accountants and other agents representing people who work through intermediaries or representing engagers of people working through intermediaries. HR managers and those who deal with recruitment processes and payroll.

The Income Tax (Pay As You Earn) (Amendment) Regulations 2024 – Draft

These draft regulations make amendments to the Income Tax (Pay As You Earn) Regulations 2003 (‘PAYE Regulations’), inserting new regulations regarding the recovery of PAYE following a compliance check into the application of the off-payroll working rules.

These draft regulations set out the mechanism by which HMRC will be able to account for taxes already paid by individuals and their intermediary on income received from an off-payroll working engagement when recovering the tax due under PAYE from the deemed employer.

This mechanism will apply where HMRC establishes that Income Tax or Corporation Tax has been paid, or assessed, by the worker or the intermediary in relation to the income received from their off-payroll working engagement, which has subsequently been recategorised as a deemed direct payment under the off-payroll working rules.

The regulations allow HMRC to calculate this amount of Income Tax or Corporation Tax using a best estimate that can reasonably be made by HMRC, recognising that HMRC will not always have complete information on the tax affairs of the worker and their intermediary.

However, HMRC will not be able to apply a set-off if it is not in receipt of a tax return which includes an amount of tax that appears to be referable to that deemed direct payment. This is because HMRC must be able to verify tax details of the worker and their intermediary and update the tax and NICs records accordingly.

Where HMRC applies a set-off against the deemed employer’s PAYE liability, it will issue a direction notice to the worker and the intermediary, as well as the deemed employer or relevant person. This notice will set out the engagement to which the direction relates, the relevant tax years and the amount of the set-off.

Due to taxpayer confidentiality, HMRC will only be able to provide the deemed employer or relevant person with the total set-off amount being applied, it cannot break this down by individual workers and intermediaries.

Where a direction is given, the worker and the intermediary will be prevented from making a subsequent claim for a repayment, relief or deduction against any tax liability in respect of the tax paid on the off-payroll working income that has been treated as set-off against the deemed employer’s PAYE liability. This ensures that HMRC collects the right amount of tax and does not end up giving relief twice in respect of the same income.

A worker and their intermediary will have the right to appeal against a direction notice issued under these regulations. They will have 30 days from the date the direction notice is issued and must appeal to HMRC in writing specifying the grounds of their appeal.

The worker or intermediary can appeal on the grounds that they did not receive the payment to which the notice relates, or that no tax was paid on this payment, or that that the amount included in the notice is incorrect, or that a trigger event did not occur. If the amount in the notice is incorrect, the worker or intermediary will be invited to provide further information to support a correct amount of set-off to be applied.

The deemed employer will not have a right to appeal against the notice. Instead, they can appeal their PAYE determination under Regulation 80 of the PAYE Regulations.

Taking account of National Insurance contributions (NICs)

As set out in the consultation document, Class 1 primary NICs paid by a worker in respect of their off-payroll working income can be set off against the Class 1 primary NICs liability of their deemed employer. Similarly, where a worker is providing their services through a partnership or individual intermediary, they may have paid Class 2 and Class 4 NICs in respect of their off-payroll working income. These amounts may also be set off against a deemed employer’s Class 1 primary NICs liability.

However, no set-off will be given in respect of a deemed employer’s Class 1 secondary NICs liability. Instead, any Class 1 secondary NICs already paid by the worker’s intermediary may be eligible for a repayment, which the intermediary must claim.

Whilst new PAYE regulations are required to account for Income Tax and Corporation Tax, existing NICs regulations may be used to account for NICs already paid. Regulation 51 of the Social Security (Contributions) Regulations 2001 (‘NICs Regulations’) allows HMRC to treat Class 1 primary and Class 2 NICs that have been paid incorrectly as paid on account of contributions properly payable. Regulation 101 allows the same treatment for Class 4 NICs.

Next steps

The consultation invites interested parties to comment on the technical detail of the draft statutory instrument. Any comments on the draft regulations should be sent to offpayrollworking.legislation@hmrc.gov.uk.

The consultation will run for 4 weeks commencing on 25 January 2024 and ending on 22 February 2024.

Responses to this technical consultation will then be reviewed and the draft regulations will be revised as appropriate before they are laid before Parliament.

On request this document can be produced in Welsh and alternate formats including large print, audio and Braille.