ESM10038A - off-payroll working: Setting off Tax and National Insurance contributions already paid: The set-off process: Case study
In September 2025, HMRC carries out a compliance check into the Off-Payroll Working (OPW) engagements of a medium sized client, Simple Business Ltd, and concluded that its status determinations for three engagements were incorrect.
The engagement between Simple Business Ltd and the three PSCs, Scotty Solutions Ltd, AL&B Ltd and Maya Smith Ltd were incorrectly determined as ‘outside’ the OPW rules. Each PSC received £60,000 from Simple Business Ltd, and these payments should have been treated as ‘inside’ the rules. This means that each engagement should have been determined as ‘employed’ for tax purposes and Simple Business Ltd should therefore have operated PAYE on the payments made to these PSCs.
Under the OPW rules, Simple Business Ltd is the deemed employer. As a result, Simple Business Ltd is liable for £11,428 of income tax and £10,235 of employer and employee NICs due under PAYE.
Simple Business Ltd have agreed to the gross PAYE liability due. Below, the tax position of each worker and their intermediary has been set out to determine the amount that can be set-off against the gross PAYE liability due.
Worker 1
Scotty is an IT contractor who provides his services through his PSC, Scotty Solutions Ltd. Scotty started his 12-month contract with Simple Business Ltd on 6 April 2024.
Scotty Solutions Ltd only had one engagement for the year and sends the client an invoice for £5,000 each month. During the engagement Scotty incurs £550 per month of expenses including for travel, software, subscriptions and professional fees, the cost of which, £6,600 for the year, is met by his PSC. Scotty Solutions Ltd also makes pension contributions of £750 per month during the year on behalf of Scotty.
Scotty receives a salary from Scotty Solutions Ltd up to the personal allowance threshold, as well as a dividend at the end of the year. The PSC’s taxable business profit is as follows:
| Gross income | £60,000 | |
| General expenses | (£6,600) | |
| Pension Contributions | (£9,000) | |
| Salary | (£12,570) | |
| Employers NICs | (£479) | |
| Total allowable expenses | (£28,649) | |
| Profits chargeable to CT | £31,351 |
Scotty and his PSC submitted their 2024 to 2025 corporation tax return and self-assessment return on 30 May 2025. The PSC paid corporation tax of £5,957 on its business profits. Scotty Solutions Ltd retained 10% of the profits after tax and distributed the remaining profit to Scotty. Scotty received a dividend of £22,500 and paid income tax of £1,925 on it. The total tax paid by Scotty and his intermediary on this engagement is as follows:
| Type | Corportation Tax | Income Tax | Employee NICs | Employer NICs | Total |
| Scotty Solutions Ltd | £5,957 | - | - | £479 | £6,436 |
| Scotty | - | £1,925 | - | - | £1,925 |
| Total | £5,957 | £1,925 | - | £479 | £8,361 |
Note: This is calculated using 2024 to 2025 tax rates, thresholds, and allowances
Worker 2
Alan is a project manager who provides his services through his PSC, AL&B Ltd. Alan’s spouse Becky is also a shareholder of AL&B Ltd. Alan started a 12-month contract with Simple Business Ltd on 6 April 2024.
AL&B Ltd only had one engagement for the year and sends the client an invoice for £5,000 each month. During the engagement Alan incurs £400 per month of expenses for travel expenses, subscriptions and professional fees, the cost of which, £4,800 for the year, is met by his PSC. AL&B Ltd also makes pension contributions of £10,000 for the year on Alan’s behalf.
Alan receives a salary from AL&B Ltd up to the personal allowance threshold, as well as a dividend. The PSCs taxable business profit is as follows:
| Gross Income | £60,000 | |
| Expenses | (£4,800) | |
| Pension contributions | (£10,000) | |
| Salary | (£12,570) | |
| Employers NICs | (£479) | |
| Total allowable expenses | (£27,849) | |
| Profits chargeable to CT | £32,151 |
Alan and his PSC submitted their corporation tax return and self-assessment return on 30 June 2025. The PSC paid corporation tax of £6,109 on its business profits. AL&B Ltd paid out an equal dividend to each of its shareholders: Alan and Becky each receive £13,021. Alan paid income tax of £1,096 on the dividends he received from his PSC. The total tax paid by Alan and his intermediary on this engagement is as follows:
| Type | Corportation Tax | Income Tax | Employee NICs | Employer NICs | Total |
| AL&B Ltd | £6,109 | - | - | £479 | £6,588 |
| Alan | - | £1,096 | - | - | £1,096 |
| Total | £6,109 | £1,096 | - | £479 | £7,684 |
Note: This is calculated using 2024 to 2025 tax rates, thresholds and allowances
Worker 3
Maya is an IT contractor who provides her services through her PSC, Maya Smith Ltd. She started her 12-month contract with Simple Business Ltd on 6 April 2024 and sends an invoice for £5,000 each month as agreed.
At the time of the compliance check, Maya and her PSC had not yet submitted their corporation tax return and self-assessment return for the 2024 to 2025 tax year. The PSCs taxable business profit is not yet known, and no tax has been paid by Maya and her intermediary on this engagement. Therefore, Simple Business Ltd will need to account for the full amount of income tax and NICs in respect of its engagement with Maya as a set-off will not be available.
Following the end of the compliance check, HMRC will issue a letter notifying Maya and Maya Smith Ltd of its determination and the action that Maya and her PSC will need to take to ensure the correct tax and NICs is paid.
Calculation of a set-off
To calculate the set-off, the amounts of corporation tax and income tax already collected will be set off against the income tax and NICs due under PAYE from Simple Business Ltd.
For the income tax element of Simple Business Ltd’s PAYE liability, HMRC will set off any corporation tax assessed by Scotty Solutions Ltd and AL&B Ltd, as well as any income tax assessed by Scotty and Alan on the income received from their PSC. As Maya and Maya Smith Ltd have not yet submitted their tax returns for the year a set-off cannot be given for that worker’s engagement.
HMRC have collected a total of £12,066 (5,957+6,109) in corporation tax from Scotty Solutions Ltd and AL&B Ltd. A total of £3,021 (1,925+1,096) in income tax has also been collected from the dividends received by Scotty and Alan. This information was obtained from the tax returns of the worker and their intermediary, and these amounts totalling £15,087 (12,066+3,021) will be set off against the income tax due under PAYE.
HMRC have also collected a total of £958 (479+479) in employer NICs from Scotty Solutions Ltd and AL&B Ltd. This amount will not be included in a set-off calculation because it is a distinct and separate charge levied on the employer. Scotty Solutions Ltd and AL&B Ltd are not the employers for the purposes of the OPW rules and will be issued with a form, following the end of the compliance check, to claim a refund from HMRC for the employer NICs that has been paid.
Simple Business Ltd is the deemed employer and is liable for the gross PAYE liability that should have been deducted from Scotty, Alan and Mayas engagement of £64,989 (3 x (11,428+10,235)). A total of £15,087 (12,066+3,021) of income tax and corporation tax has been collected from the workers and their intermediaries and is available to set-off against this PAYE liability.
Settlement of PAYE liability
Following the calculation of the set-off, HMRC issued a direction notice to Simple Business Ltd and Alan, Scotty and their PSCs informing them of the amount of set-off relevant to them. Neither Alan nor Scotty appealed their direction notices.
The net PAYE liability for Business Ltd in respect of the three sets of engagements is as follows:
| Type | Income Tax | Employee NICs | Employer NICs | Total |
| Gross PAYE liability | £34,284 | £9,633 | £21,072 | £64,989 |
| Amount set off | (£15,087) | - | - | (£15,087) |
| Net PAYE liability | £19,197 | £9,633 | £21,072 | £49,902 |
As demonstrated, the set-off received for each engagement is dependent on the circumstances of the workers and their intermediaries including the business expenses that have been claimed, the dividends that have been drawn, the amount the worker is remunerated etc.
In this case, the set off available is £15,087 and this reduces the PAYE liability by 23%. Simple Business Ltd is therefore required to pay £49,902 to settle its liability.