Long awaited IR35 set-off consultation could lead to more 'outside' roles

IR35 is complicated and unfair, as we know – but one aspect of the new off-payroll rules that has really stuck in the throat is that the legislation creates a very real threat of double taxation. That means, under IR35, the same income can be taxed twice.

Thankfully, there are now plans afoot to deal with this anomaly, and not a moment too soon. We even hope that the proposed fix, which IPSE firmly supports, might embolden clients to take on more contractors in ‘outside’ IR35 roles.

Since 2017 in the public sector and 2021 in the private sector, clients have been responsible for making IR35 determinations, and the ‘fee-payer’ (sometimes the client, often an agency) would be liable for tax deductions. Where the client determines that IR35 does not apply, the fee-payer can pay the contractor gross – just as they did prior to the reforms – and the contractor will pay tax on the income.

So far, so good - but if HMRC take issue with the determination, it will go after the fee-payer for all the tax and NI it says should have been deducted at source.

In the above example, HMRC will have received two sets of tax on the same income – one from the contractor, one from the fee-payer. There is currently no way to off-set tax which has already been paid, from that which HMRC say is now due.

All the way back in 2021, IPSE called for the introduction of a ‘set-off’ mechanism that would bring a small dose of sanity to the bizarre, unfair world of the then very new off-payroll rules. Not only were we concerned that the lack of a set-off would lead to double taxation, we could also see that the rules create a huge risk for clients and agencies engaging contractors on ‘outside’ roles. If they make an ‘outside’ determination that is later proved to be wrong, HMRC will demand all the tax and NI from the fee-payer, on top of – not deducted from – the money paid to the contractor.

This problem contributed to the huge over-compliance we’ve seen since the rules changed – where clients unreasonably decide all roles are inside IR35 (blanket assessments) or just refuse to hire contractors working through their own limited company altogether (blanket bans).

No wonder the Office of Budget Responsibility recently doubled it’s forecast for the amount that IR35 will bring in to the Treasury’s coffers – now £1.5bn a year. Clients are very cautious about issuing outside determinations – the risk is just too big.

It’s taken the best part of two years but at long last we have some progress on this issue. Last week, on the excitingly named Tax Administration and Maintenance Day, the government published a technical consultation called Off-payroll working: calculation of PAYE liability in cases of non-compliance which sets out a sensible plan to deal with the problem. It will, assuming it is implemented from next April as scheduled, also apply retrospectively, so all engagements since 2017 will be covered.

Tax, including Corporation Tax, dividend tax and salary taxes, paid by the contractor (and their ltd co) on the income from a specific engagement, will now be deducted from the total tax due in the event that HMRC can establish the initial outside determination was wrong. The government admits there may be some estimates and assumptions made when calculating the tax already paid, which is realistic and sensible.

The amount of tax paid by the contractor will also be impacted by reliefs and expenses claimed, but in most cases, the set-off will substantially reduce the liability borne by the fee-payer and it will remove the danger of double taxation.

To think about this in very simple terms … it could be that in many cases, the tax already paid by the contractor will cover the ‘employee’ tax burden i.e. PAYE and employees’ NI – while the fee-payer will be left to cover the employers’ NI and Apprenticeship Levy where applicable. Not only would this sharing of the overall burden be more fair, but it will also mean clients and agencies shoulder considerably less risk when they engage a proper contractor on a business-to-business basis.

This legislative fix is not the answer to all our prayers – it would still be much, much better to scrap IR35 altogether – but it is a sensible move that might just unclog supply chains a little and make it easier for firms that want to engage independent, flexible workers. It should also remove the possibility that income could be taxed twice.

The consultation period is an unusually short 8 weeks (the deadline is 22 June) which perhaps suggests the government is keen is get on and legislate this. IPSE will submit a formal response, but you may want to as well, so please do have a read through the relatively concise document.

If you have any queries or thoughts on the proposal, we’d love to hear them. You can email us at [email protected]