Consultation outcome

Off-payroll working: calculation of PAYE liability in cases of non-compliance - summary of responses

Updated 22 November 2023

Executive summary

The consultation, Off-payroll working (IR35) – calculation of Pay As You Earn (PAYE) liability in cases on non-compliance, was published on 27 April 2023 and was open for responses until 22 June 2023. In this consultation, the government sought views on its proposal to introduce a legislative change to address the potential over-collection of tax under the rules.

This change would allow HM Revenue and Customs (HMRC) to account for taxes already paid by an individual and/or their intermediary when calculating a PAYE liability due by a deemed employer where an error has been made in applying the off-payroll working rules. This is commonly referred to as a ‘set-off’ in this document.

The consultation sought views on the proposed policy before deciding on the best way to address the issue. It did not seek views on changes to the off-payroll working rules legislation more generally or how employment status is determined.

We received 45 written responses to the consultation, as well as holding 3 online webinars and one in-person event with external stakeholders.

This document summarises the responses received to the questions set out in each of the sections of the consultation.

Responses

Overall, the response to the consultation was broadly positive, with the majority of respondents supporting the government’s proposal to introduce a set-off, whilst raising some queries around the practical aspects of the policy, such as how a set-off would be calculated and applied.

There was wide acceptance that the introduction of a set-off would be a workable solution to the risk that HMRC may collect more tax than is due or that the worker and their intermediary bears none of the cost of a tax on an engagement.

The majority of responses understood that, due to the lack of information that HMRC would have access to, there may be a need for HMRC to estimate the amount of tax and National Insurance contributions (NICs) that has already been paid by a worker and their intermediary. Respondents were clear that any estimation methodology should be published and open to scrutiny.

Most respondents also agreed with HMRC’s intention to implement any legislation in April 2024 and with HMRC’s proposal to apply the set-off to deemed direct payments made from 6 April 2017, where there hadn’t already been a settlement. There was also broad agreement from respondents that collecting information necessary to facilitate a set-off shouldn’t create an undue administrative burden for the client.

Additional considerations

Responses to the consultation identified a number of additional proposals that warranted further consideration, including:

• extending the appeal provisions to include the deemed employer and extending the time limit from 30 days
• expanding the scope of the set-off mechanism to include other taxes, such as employer NICs and tax charged on loans to participators in a close company
• extending the set-off mechanism to apply to Chapter 8 (IR35) and Chapter 9 (Managed Service Companies) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

The government has considered these proposals and has decided not to widen the scope of the taxes available to be set-off and will not be introducing additional appeal rights for the deemed employer or extending the time limit for an appeal beyond 30 days.

The government acknowledges the merit in exploring extending the provision of a set-off to Chapters 8 and 9 of ITEPA and will undertake further work to explore this proposal. This may include supplementary consultation with industry and representative bodies.

Further information on the reasoning for these decisions can be found in the ‘Responses’ section of this document.

Introduction

Background

The off-payroll working rules (commonly known as IR35) were first introduced in 2000. The rules 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 government introduced an administrative reform to improve compliance with the existing rules, first for clients in the public sector in 2017 and then to medium and large-sized clients in the private and voluntary sectors in 2021. The reforms shift responsibility for determining employment status, and for ensuring the right tax and National Insurance is paid to HMRC, from the worker’s intermediary to the client engaging them.

If the client is found by HMRC to have incorrectly determined a worker is outside the rules (ie self-employed) when they should have been inside (ie deemed employed), 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.

Current legislation does not allow HMRC to set off amounts of tax already paid by a worker and their intermediary against the PAYE liability of the deemed employer. Instead, where a worker and their intermediary have paid tax and NICs on income that should have been subject to the off-payroll working rules, they may be entitled to claim a repayment for amounts they have overpaid. The current process results in the deemed employer bearing the full cost of the tax and NICs liability.

The consultation set out HMRC’s considerations for, and invited views on, an alternative proposal to introduce new legislation to share the Income Tax and NICs liability between the client and the worker, by estimating a set-off for tax and NICs already paid by the worker and their intermediary.

Previous engagement

HMRC has been engaging with industry and representative bodies since 2021 and has undertaken a significant amount of informal consultation with key stakeholders. HMRC hosted a series of policy development workshops with members of the Employment Status and Intermediaries Forum and employment tax experts. These workshops explored whether there was a feasible legislative solution to ensure HMRC collects nearer to the right amount of tax, and that the burden of tax is shared more equitably between parties.

This positive and constructive engagement led to the identification of a possible option, which formed the basis of the consultation.

Responses

The government received 45 responses to the consultation. The majority were from representative bodies and tax advisers, some of whom had already contributed to the informal consultation.

The breakdown of the respondents is:

• representative bodies: 13
• businesses: 22
• individuals: 10

A full list of the corporate respondents can be found in Annex A.

The government also held 3 online webinars and attended 1 in-person event. These events were held in association with public sector organisations, recruitment businesses and an accountancy body.

Responses outside the scope of the consultation

There were a small number of responses that provided feedback outside the scope of the consultation. For example, some individual respondents, as well as some representative bodies, expressed the view that whilst the introduction of a set-off was a good idea, they were in favour of wider reform that either replaced the off-payroll working rules with an alternative or rolled the rules back to the position they were in before the 2017 and 2021 reforms.

Respondents also suggested that HMRC should introduce a statutory clearance process for status determinations. This is outside of the scope of this consultation. Clients are already able to use HMRC’s Check Employment Status for Tax (CEST) tool to help them in making status determinations, as well as HMRC guidance.

In addition, respondents suggested that there should be a route for reporting non-compliant clients or clients that are issuing blanket determinations. Where non-compliance with the off-payroll working rules is taking place, including clients issuing blanket determinations, customers can report this to HMRC through GOV.UK.

Respondents also raised concerns related to a recent legal decision. While this matter is out of scope for this consultation, HMRC are grateful for the feedback on the issues that stakeholders consider result from this.

Responses

Taxes to be in scope of a set-off calculation

This section sought views on the proposed scope of the tax and NICs included in a set-off calculation.

The proposal set out that HMRC would only allow for a set-off to be given against a deemed employer’s liabilities for Income Tax and employee NICs due under PAYE in respect of the worker. It would not be given against any employer NICs due by the deemed employer, or Apprenticeship Levy if applicable.

The set-off amount would account for Corporation Tax (CT) paid by the worker’s intermediary, income tax and employee NICs paid on a salary to the worker from their intermediary, Class 2 and Class 4 NICs paid by the worker and tax paid on dividends received by the worker from their intermediary, where these amounts are paid out of income from the off-payroll working engagement.

The amount would not include any employer NICs paid by the worker’s intermediary, Class 3 NICs paid by the worker or tax and NICs paid on any salary and dividends received by any other employees, directors or shareholders of the intermediary.

Question 1: Do you agree with the taxes that would be included in and excluded from a set-off? If you do not agree, please explain why.

There were mixed views amongst respondents and many agreed with the scope of taxes set out in the consultation. However, around a quarter of respondents thought that the scope should be wider and that employer NICs paid by the intermediary should be included, as this may also have been paid on a salary in relation to the off-payroll working engagement. 

A couple of respondents also thought that the set-off should include all taxes paid by the company, or by connected parties along the supply chain, as well as any tax and NICs paid on salary and dividends received by others from the worker’s intermediary. 

“The taxes within scope are acceptable but do not go far enough. Employers and workers alike would expect employer’s NIC paid by the intermediary to be available for offset against employer’s NIC due by the end client.” Accountancy body

One respondent questioned if the CT paid by a worker’s intermediary would include tax collected under section 455 of the Corporation Tax Act 2010 (CTA), which concerns loans to participators in a close company. Another highlighted that, where the worker’s intermediary is a partnership, the income tax paid on the worker’s share of the partnership profits reported on their Self Assessment should be included in the scope of the set-off. This respondent also suggested HMRC set out a hierarchy for the taxes it collects. 

Respondents also requested that, if employer NICs are excluded from the set off, HMRC provides clarity in its guidance on the NICs refund process and ensure workers are aware of any timeframes involved. 

Government response

Respondents asked to extend the provision of the set-off to apply other taxes that may have arisen from the engagement, including employer NICs, section 455 charges and taxes paid by other shareholders/employees.

It has always been the case that an employer is liable for any employer NICs due on the earnings of their employees. Where the off-payroll working rules apply, the deemed employer is liable for the employer NICs that should have been paid to HMRC. The employer NICs should not be paid or recovered, wholly or in part, from the worker or their intermediary. The government therefore remains of the view that employer NICs should not be included in the scope of the set-off. HMRC’s existing guidance provides details on the process and time limits for reclaiming employer’s NICs, and HMRC will make this clear to the intermediary.

A tax charge under section 455 CTA 2010 occurs where a loan or advance has been made to a participator in a close company that remains outstanding after a certain time, subject to certain conditions. However, this is a distinct and separate charge that is not directly related to the services provided by the worker. As such, it is not possible to definitively say that the charge represents tax paid on the income from the off-payroll working engagement.

In addition, section 458 CTA 2010 allows for relief where a loan is repaid or released. HMRC would have to restrict this relief by any amount that has been set-off. This would be difficult to apply operationally and add complexity to the process. Therefore, any section 455 tax charge will not be within the scope of this set-off.

For taxes paid by other shareholders or employees of the intermediary, there is a distinct separation from the off-payroll working engagement as payments will not have been made in relation to the services provided by the worker to the client. Remuneration paid to other employees will be in respect of services provided to the intermediary under a contract of employment. Another shareholder in a limited company will receive a distribution by virtue of their shareholding. Under the off-payroll working legislation at section 61W ITEPA, there is no relief for taxes paid on these amounts. To ensure a consistent application of the rules, these amounts will also not be included in any set-off.

The government has always intended for Income Tax and NICs paid by a partner on their share of their partnership’s profits to be included in the scope of the set-off. This is because the tax is paid in relation to income earned from the off-payroll working engagement, which would otherwise be subject to double taxation. The government is grateful to the respondent for highlighting this omission from the list of taxes to be in scope, which will be included in the set-off.

Calculating the tax and NICs already paid by a worker and their intermediary

HMRC does not have complete information on the treatment of off-payroll working income for each worker and intermediary. It is therefore currently unable to accurately determine the amount of tax and NICs that has been paid by a worker and their intermediary with respect to a particular off-payroll working engagement.

To arrive at accurate figures would require an understanding of the worker’s intermediaries entire trading and remuneration pattern. This fact finding would add significant delay and place an unnecessary administrative burden on both individual workers and HMRC. Therefore, it is not practical in most cases.

This section sought views on the government’s proposal to overcome these challenges by using available evidence to estimate the amount of tax paid by a worker and their intermediary that represents tax paid on off-payroll working income. This may include using assumptions and best judgement, which will be informed by tax return data and HMRC’s understanding of historic patterns of behaviour and tax receipts.

This section also sought views on whether providing a set-off could have any additional tax impacts on the deemed employer, the worker or their intermediary.

Question 2: Are there any adverse impacts on the deemed employer, the worker or their intermediary as a result of HMRC estimating the amount of the set-off that would be given? If so, please provide details of these impacts.

Many respondents acknowledged that an estimate was appropriate if HMRC does not hold the information necessary to provide an accurate amount. A small number of respondents assumed that HMRC has access to all the required information on its systems already, and therefore should be able to calculate accurate set-offs. 

“It would of course be fairer and correct for all parties to use actuals rather than estimates. Understanding the work involved from an HMRC perspective, on balance I would agree estimates are ok especially when a change in circumstances is covered in the appeals process.” Client Organisation

If HMRC determines it necessary to use an estimate, then respondents were clear that for fairness, HMRC needs to be open and transparent about the methodology it uses to determine the amount of the set-off being provided. As an estimation will likely over- or under-estimate the amount due, a significant minority of respondents felt that the deemed employer should be given the chance to appeal the amount if they have evidence that produces a more accurate amount. 

“Any legislation should allow for the deemed employer to request that actual amounts are used when they are able to provide HMRC with details of the amount and sufficient information to enable HMRC to check the employer’s estimate.” Representative body

One respondent suggested that if HMRC is using the worker’s previous activity to determine the amount then this look back period should be limited to 3 years due to the frequently changing nature of contracting work.  

One respondent suggested that rather than estimating the amount due, HMRC should only calculate the employer NICs due on the deemed direct payment and assume all other taxes have or will be paid. 

Another respondent raised concerns that the timing of tax return submissions by the worker and their intermediary may cause problems because, even when statutory deadlines are met, there could be delays in returns being submitted or waiting for additional information and therefore delays in the set-off being applied. This would also have the effect of accruing interest on any liability. They suggest an approach where a notional flat rate is used for the set-off that broadly accounts for the positions that workers and intermediaries have taken on tax returns historically. 

Question 3: Would giving a set-off have any impacts on other parts of the tax system for either the deemed employer, worker or their intermediary?

Most respondents did not identify any additional impacts for the deemed employer, worker or their intermediary.

A few respondents stated that it was important that, where an engagement has been recategorised, the worker’s NICs records should be updated to reflect the income as employment income, as this may affect the worker’s entitlements to certain benefits and state pension.

“Critically, individuals’ NIC records will also need to be updated where a deemed employer settles in respect of an employee’s Class 1 NICs.” Accountancy body

Some respondents asked HMRC to issue guidance clarifying any VAT implications, whilst another stated HMRC should pledge not to use info from this process to open new lines of enquiry into workers or their intermediaries. Another respondent thought that consideration needed to be given to potential interactions with other contractor related taxes and reliefs, particularly the Research and Development relief schemes.

Government response

As explained in the consultation, HMRC does not have access to all of the information that would be required to accurately determine the amount of tax that has been paid by the worker and intermediary for a particular off-payroll working engagement. The government does not think it is practical for HMRC to approach each worker and their intermediary for this additional information, given the administrative burdens and delays that would result for customers and HMRC. As no significant impacts were identified by stakeholders on the proposed approach to estimating the set-off, the policy will proceed on the basis that HMRC will use its best estimate to determine the amount of tax and NICs to set off.

As part of this approach, HMRC will work with deemed employers to ensure all relevant information is accounted for when producing the estimate. It will also take steps to ensure that any assumptions made, and the methodology for determining the estimate, are explained clearly to the deemed employer. However, due to HMRC’s duty of taxpayer confidentiality, it will not be able to share specific information about the tax affairs of individual workers or their intermediaries with the deemed employer. Deemed employers will have the opportunity at this point to provide any further information that it holds to help inform the set-off calculation.

HMRC will also allow the worker and their intermediary to dispute the amount of the set-off being provided and provide further information to allow HMRC to more accurately calculate the set-off amount.

HMRC will also consider how it can clarify its guidance related to any VAT implications.

Directions and appeals

This section set out how HMRC will notify the worker and the intermediary that a set-off is being applied and the proposed routes of appeal available to workers and their intermediaries.

Under the proposed policy, where the deemed employer is eligible for a set-off, the worker and their intermediary would be notified via a direction notice that a set-off will be given. The worker and their intermediary will not be able to amend their tax returns to claim repayments for amounts that have been set against the deemed employer’s PAYE liability.

In a similar manner to the operation of Regulation 72F of the Income Tax (Pay as You Earn) Regulations 2003, the deemed employer would not have a right to appeal against the direction notice or HMRC’s refusal to make a direction. The deemed employer would still be able to appeal against a determination under Regulation 80 for the PAYE liability due, as well as the Section 8 decision in relation to the Class 1 NICs liability.

HMRC will allow the worker and their intermediary to dispute the amount of the set-off being provided and provide further information to allow HMRC to more accurately calculate the set-off amount.

Question 4: Do these grounds for appeal provide sufficient safeguards for deemed employers, workers and their intermediaries where they disagree with the directions to set off amounts already paid against their deemed employer’s PAYE liability?

Responses to this question were mixed, although the majority supported the governments proposals.

Several respondents acknowledged that the appeal provisions were modelled on those for Regulation 72F and were happy for them to be replicated as they were unaware of any issues that have arisen from that process. 

“These proposals are consistent with the current operation of Regulation 72F and as those processes, rights, obligations and limitations are generally understood, we do not anticipate any concerns.” Accountancy body

Around a quarter of respondents wanted an additional route of appeal for the deemed employer to disagree with the amount of the set-off.  

There were also significant minority of respondents that stated 30 days was not sufficient for the worker or their intermediary to appeal and that this should be extended to either 45, 60, or 90 days. There was also a suggestion that the worker and intermediary should be able to appeal if they disagree with HMRC’s status determination. 

“We do not believe that the proposed 30-day period from when a direction is issued to lodge an appeal is long enough, given that it might take 10 days for the direction notice to arrive and gathering the necessary information may also be time consuming. We think that a 60-day period would be more appropriate.” Representative body

One respondent was concerned that the worker and intermediary may not appeal if a direction is issued incorrectly or where the set-off amount is incorrect, as they are not legally responsible for any resulting PAYE. In this circumstance, the deemed employer has no direct recourse to ensure that the amount of the set-off is correct. Another was concerned that workers may appeal the amount to cause problems for the deemed employer. 

Government response

A 30-day time limit for appeals is consistent with other time limits for HMRC decisions, including for appeals related to direction notices issued using Regulation 72F and for determinations made under Regulation 80. 30 days is a standard appeal period for HMRC, and there is no rationale for breaking precedent in this case.

During a compliance check, HMRC and the deemed employer will engage in discussions to reach an agreeable settlement position. As part of this process, the deemed employer will have the opportunity to provide information to support the calculation of the set-off ahead of the amount being finalised.

Regulation 72F also does not contain a route for the employer to appeal the set-off amount and it is important to maintain consistency with these regulations to ensure fairness for different types of engagements. Granting the deemed employer an appeal right for set-offs and not Regulation 72F would be inconsistent and result in a situation where the deemed-employer could be advantaged. 

Additionally, the amount being offset relates to the amount of tax what has been paid by the worker and their intermediary, so it is more appropriate that the appeal rights rest with them, as they will be in a position to know whether the amount is incorrect. Furthermore, the direction notice will offer the worker and their intermediary the opportunity to provide more accurate calculations of the tax and NICs paid on their off-payroll working income.

Appeals from workers or intermediaries will be checked by HMRC to determine the validity of the appeal and consider any further information provided. HMRC would not condone workers submitting unsubstantiated claims. 

Therefore, the government considers the appeal provisions to be sufficient to safeguard the deemed employer, so does not intend to enable them to appeal the set-off amount.

Information required for a set-off

This section asked about the information clients currently collect for their engagements and whether they would foresee any difficulties in collecting the information needed by HMRC to facilitate a set-off. Suggested information that HMRC could need included:

• the worker’s name and address
• the worker’s date of birth
• the worker’s National Insurance Number (NINO)
• the intermediary’s name and address
• the intermediary’s VAT Registration Number (VRN) or Company Registration Number (CRN)

Question 5: What information do you, as the client, routinely gather as part of your hiring practices for off-payroll workers?

There was variety in the information that respondents gathered, and this depended on how they engaged workers and their position in the contractual chain. There were also a number of respondents who did not provide a response to this question as they did not engage workers.

The majority of respondents indicated they collected the name of the worker and their intermediary, along with the CRN and VAT registration number.

“As a bare minimum, businesses will ask for the worker’s name, address, date of birth, National Insurance Number (NINO) and confirmation of right to work in the UK plus details relevant to the intermediary: trading and legal name, corporate registration details and tax registrations.” Accountancy body

A large minority of respondents stated they would be unlikely to record the worker’s date of birth, NINO or address, as this would not normally be required when engaging another business to provide services that are considered to be ‘outside‘ of the off-payroll working rules.  

“We would not expect the end client to uniformly collect personal information such as the worker’s address, date of birth, and NINO, since that is information you would normally collect from an employee not an outside contractor.” Representative body

B: Please provide your views on how easily a client would be able to obtain the above information and provide this to HMRC if requested.

A few respondents who engaged workers via an intermediary said workers were wary of clients requesting information such as NINOs and dates of birth, and that they could refuse to provide this if requested. They suggested HMRC publish clear guidance setting out what information would be required so that they could show this to workers as justification for requesting it. Others suggested a statutory duty on the intermediary or agency to provide the information when asked, although others raised concerns that collecting and storing this information may not be compliant with data protection and General Data Protection Regulation (GDPR) rules. 

“If there is no statutory obligation to collect then many workers will be disinclined to supply this confidential personal data, effectively preventing HMRC from applying the set off.” Representative body

Some respondents suggested that it would be more difficult to collect information relating to historic engagements and that some workers may also only have a temporary or no NINO, especially if they are usually based overseas. 

There were a couple of respondents who suggested that HMRC should already have access to all the information required to provide a set-off and that there should be no requirement on the client to collect it.  

Government response

The government understands that the information currently being collected by clients varies greatly, especially in circumstances where the engagement is determined to be outside the off-payroll working rules.

The government acknowledges that some organisations have expressed concerns that they will not be able to collect the information required from the workers’ intermediaries without guidance or a clear statutory obligation.

HMRC is at risk of under-collecting tax if it does not very verify workers and intermediaries included in a settlement, and carry out assurance checks, including to determine whether the worker and their intermediary has already paid tax on the engagement. Following further consideration and analysis, HMRC has determined that, as a minimum, it will require the following information to be able to identify most workers and intermediaries on its systems:

• the worker’s name or NINO
• the intermediary’s name
• the intermediary’s CRN or VRN

The government does not consider it appropriate to introduce a statutory obligation on deemed employers, workers, or intermediaries to provide information required for a set-off. However, it will ensure there is clear guidance for both workers and clients setting out the information that organisations will require to facilitate a set-off.

GDPR rules do not prevent organisations from maintaining records, but requires organisations process personal data in line with the Data Protection Act 2018.

Impacts on compliant behaviour

This section sought views on whether introducing a set-off could adversely incentivise compliant organisations to change their behaviour.

Question 6: Would allowing a set-off create any adverse incentives or changes in behaviour amongst clients, or other parties in the labour supply chain, when determining whether the off-payroll working rules should apply?

Most respondents indicated that they did not anticipate the proposal leading to a drastic change in behaviour.

There were a number of respondents who suggested introducing a set-off would reduce the financial risk to the client of getting their status determinations wrong, meaning they may be less likely to ‘over-comply’ with the rules in future. They suggested that genuinely self-employed workers may benefit from this as client may engage more workers on a genuinely self-employed basis. This was considered to be a positive outcome. 

“My expectation is that hiring clients will be prepared to invest in implementing rigorous processes for their management of IR35, free of the paralysis caused by the unfair requirement to foot the entire tax bill, and the market can normalise to levels of outside IR35 engagement that are in line with HMRC’s original expectations.” Legal services provider

One respondent suggested that there may be a risk that some clients could face pressure from parties in the labour supply chain, including the fee-payer, to determine that the off-payroll working rules do not apply. Another suggested limiting the eligibility for a set-off only to those who have taken reasonable care. 

Government response

The government is pleased that respondents did not anticipate introducing a set-off would significantly incentivise adverse behaviour.

The government understands that, for commercial reasons, some organisations decided to change how they engaged with workers following the reforms to the off-payroll working rules, with some deciding to no longer engage workers through their intermediary. It is for each organisation to consider the most appropriate way of engaging workers for their business. As part of this, clients should take care to consider the correct employment status for tax for their workers. HMRC has published extensive guidance and educational material to support clients in making these status determinations, including its Check Employment Status for Tax (CEST) tool.

The government will continue to monitor the impacts of the off-payroll working rules on how clients engage contingent labour.

Application

This section sought views on the implementation date of the policy and the way it would be applied. The consultation set out the intention to implement a legislative solution from 6 April 2024, and the provision would apply to Income Tax and NICs liabilities assessed on or after 6 April 2024. It would apply to liabilities which arise as a result of an error in operating the off-payroll working rules in respect of deemed direct payments made from 6 April 2017, when the public sector reform was introduced.

The policy would not be applied retrospectively to adjust any PAYE liabilities that have been settled prior to 6 April 2024.

Question 7: Do you agree with how the government intends to apply this policy?

Most respondents agreed with HMRCs intention to implement the change in April 2024. 

“We agree that there is an urgency to implementing the measure and that April 2024 is a good target. We agree that the set-off should be applied to liabilities generated in relation to engagements since 2017. We agree that it would be overly burdensome to reopen settled cases.” Representative body

There was broad support for the measure to be applied to deemed direct payments made from 6 April 2017, whilst some respondents raised concerns about the impact this could have on ongoing compliance work. There were calls for clear guidance and communications for those with ongoing cases, so they are not disadvantaged and do not face delays. Some respondents suggested the set-off should apply from 2021, whilst some said if it was not possible to go back further then HMRC should at least apply it from the date the consultation was launched. 

Whilst most respondents acknowledged that it would be too burdensome to reopen any settled cases, there were a minority who suggested this should happen. 

There were also some responses that suggested that the penalty regime should only be levied against the net PAYE liability, after a set-off had been applied, to mirror the approach in respect of set-offs available under Part 4 of the PAYE regulations.  

Government response

The government can confirm that this legislation will be introduced in the Autumn Finance Bill 2023 and take effect from 6 April 2024. The set-off will apply to deemed direct payments made from 6 April 2017, and will be available for open and future compliance cases.

HMRC has written to some client organisations with open compliance checks to give them the option of postponing settlement until a set-off has been introduced, subject to meeting certain criteria. This is pragmatic approach to ensure HMRC avoids over-collecting tax from deemed employers who would otherwise benefit from the set-off from April 2024.

The government has carefully considered the position regarding compliance activity where there has already been a settlement and has concluded that these engagements will not be eligible for a set-off. This is due to the burden it would place on HMRC and organisations/workers. It is also HMRC’s intention to give customers certainty in their dealings with HMRC and reopening settled compliance cases would go against that principle.

Any penalties raised will be charged on the full amount of the liability assessed rather than just the PAYE liability requested by some respondents. This is consistent with HMRC’s penalty position and restricting the penalty to the PAYE liability could incentivise adverse behaviour.

Assessment of impacts

This section covered whether there would be an additional administrative burden for organisations to operate the rules or collect the information necessary for the provision of a set-off. It also sought views on whether there are any other impacts that have not been considered elsewhere.

Question 8: We expect that businesses would need to spend time familiarising themselves with the changes. Can you provide an estimate of the costs your business would expect to incur to familiarise itself with the legislation?

The majority of respondents indicated that any familiarisation costs to businesses would be negligible and it was suggested by some that any costs would be mitigated by the reduction of any PAYE liability as a result of the set-off being made available. 

“With regard to additional costs in terms of familiarisation with the proposed changes, including seeking further information about the worker and their intermediary (Question 9 below), we would expect these to be mitigated by the expected reduction in the gross PAYE due as a result of the set-off as outlined.” Accountancy body

Question 9: Would asking for further information about the worker and their intermediary result in additional ongoing costs to your business? If so, can you provide an estimate for these costs?

The majority of respondents indicated that the costs associated with collecting the further information would be negligible. There were a handful of respondents who explained that there would be an additional cost to collecting and storing the information and this could be substantial but did not quantify an amount. It was also noted that the potential costs were also dependent on the willingness of the worker and intermediary to provide the deemed employer with the information. 

“We believe the issue here Is not so much one of cost, but one of the willingness of the worker to divulge the information (see answer to Q5). It is important to be clear on exactly what information is needed, and what information isn’t.” Representative body

Question 10: Please tell us if you think there are any other specific impacts on other groups or businesses that we have not considered above.

Most respondents did not respond or indicate there were unconsidered impacts. 

One suggested that there would be an impact on small and micro businesses who would incur additional administrative burdens. Another raised concerns regarding the lack of incentive for workers and intermediaries to be compliant with the reporting of earnings and expenses. 

A couple of respondents suggested that HMRC extend the proposal to also cover the pre-reform rules, which still apply to engagements with small clients (contained in Chapter 8 of ITEPA and the Managed Service Companies rules (contained in Chapter 9 of ITEPA).

“I believe that HMRC ought also to be able to give something similar in cases that fall under chapter 8 (the old IR35 rules still applicable where there are small or foreign clients) and chapter 9 (managed service companies).” Tax adviser

Government response

The government acknowledges that there may be a small additional administrative burden for a minority of organisations to collect the information required to facilitate a set-off but noted that most organisations agreed the cost is outweighed by the potential benefit of being given a set-off.

The additional burden will only be applicable to those organisations who choose to collect the additional details, there is no legislative requirement to do so. However those organisations that do not opt to collect details would not be able to benefit from a set-off.

HMRC will ensure that there is clear guidance for workers and clients to help them ensure they are able to identify what information is required.

Whilst there are already reliefs in place for Chapter 8 and 9 of ITEPA to prevent double taxation of recategorised income, the government acknowledges the potential merits in the suggestion of extending the provision of the set-off to these chapters. The Government will continue to explore this option and consider the operational impacts and potential risks of extending the set-off before deciding whether to take this forward. However, any future change with regards to Chapters 8 and 9 of ITEPA will not take place before April 2024. Instead, the existing provisions contained in these chapters for providing relief against tax and NICs already paid will continue to be used.

Next steps

Further development of proposal

Following the largely positive response to the legislative option proposed in the consultation document, the government has announced at Autumn Statement 2023 that it will be legislating to give HMRC the powers needed to make regulations for the provision of a set-off in the upcoming Finance Bill.

Regulations will be introduced via secondary legislation after the Finance Bill obtains Royal Assent. These will enable HMRC to apply a set-off to Income Tax liabilities assessed on or after 6 April 2024, which arise as a result of an error in operating the off-payroll working rules in respect of deemed direct payments. The regulations will apply to deemed direct payments made from 6 April 2017, when the public sector reform was introduced.

The consultation responses raised some questions around the practical application of the proposal, as well as questions regarding the design of the policy. The government will consider these comments during the continuing policy development process. HMRC will also publish draft guidance ahead of the legislation taking effect.

Annex A: List of stakeholders consulted

Association of Accounting Technicians (AAT)

Association of Professional Staffing Companies (APSCo)

BDO

Blick Rothenberg

Brooksons

British Universities Finance Directors Group (BUFDG)

Company Chemists’ Association (CCA)

Chartered Institute of Taxation (CIOT)

Chartered Institute of Payroll Professionals (CIPP)

Contractor Calculator

Deloitte

EY

Freelancer & Contractor Services Association (FCSA)

Federation of Small Businesses

FTI Consulting

Grant Thornton

Humber Teaching NHS Foundation Trust

Institute of Chartered Accountants in England and Wales (ICAEW)

Institute of Chartered Accountants of Scotland (ICAS)

Institute of Financial Accountant (IFA)

The Association of Independent Professionals and the Self-Employed (IPSE)

ITV

Kent County Council

KPMG

Legal And General

Mark Coulson (IR35 Pro)

Moore Kingston Smith

Pinsent Masons

PSTax

PWC

Recruitment and Employment Confederation (REC)

RSM

Tax Centre of Excellence (TCOE)

Vialto Partners

Wiggin

Winmark