The ‘IR35 Offset’ – Reducing the risk of double taxation

The Government has released draft legislation, due to take effect on 6 April 2024, to address long-running concerns that assessments raised under the off-payroll working rules give rise to double taxation. The draft legislation seeks to introduce a tax and NIC offset to reduce a deemed employer’s liability by tax and NIC paid by a worker and, importantly, their intermediary.

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Oliver Bull
Published: 15 Mar 2024 Updated: 15 Mar 2024
Business tax Tax Payroll Employee benefits

The issue

There is currently significant HMRC activity focussed on enforcing the most recent off-payroll working (commonly referred to as “IR35”) rules that have been in place now for three years. The changes discussed in this article should be welcome for all businesses engaging with off-payroll workers.

Those engaging workers through an intermediary, such as a personal service company (PSC) have an obligation to determine the employment status of such workers in accordance with the IR35 rules.
With status determinations seldom clear-cut, and with HMRC challenges frequent, it is not uncommon for HMRC to seek to reclassify a worker as a deemed employee and assess an employer for income tax and NIC that should have been accounted for on payments to the worker’s PSC.

Similarly, some clients may approach HMRC to settle liabilities where they have identified an incorrect or previously unconsidered status assessment.

To date there has been no statutory mechanism through which liabilities already settled by the worker or their PSC can be offset against those ultimately payable by the deemed employer, often leading to double taxation.

The details

The draft legislation released by the Government aims to bridge this gap, allowing for the offset of tax and NIC already paid by the worker and/or their PSC against any PAYE liabilities due by the deemed employer under the IR35 rules. We have summarised this new mechanism below:

  • The proposed offset does not extend to employer NIC and this will remain a liability for employers.
  • The changes will allow HMRC to offset any income tax paid by the worker (such as on dividends) and corporation tax paid by the intermediary against employer liabilities. This may be a ‘best estimate’ determined by HMRC.
  • Similarly, existing provisions will be used to allow HMRC to offset class 1 (employee), class 2, and class 4 NIC against the class 1 (primary) NIC liability assessed against the employer.
  • HMRC must have received a return declaring the income from the worker or PSC. This can give rise to timing issues as a worker may not yet have declared the income from an engagement for more recent periods of assessment.

While this is a positive move, it is not all encompassing and employment status enquiries often require significant resource to deal with. Organisations should therefore continue to afford their employment status determination process due consideration.

What steps should you take now?

  • If not already being undertaken, we recommend that that previous employment status assessments are reviewed at appropriate intervals, reflecting any developments in the relationship since the previous assessment.
  • To help facilitate an offset, organisations should ensure that their onboarding process captures key information about the worker and their intermediary, including their national insurance number and the intermediary’s Company Number or VAT registration number
  • As this legislation does not extend to employer NIC, organisations may wish to review contracts to ensure that in the event a PSC is able to reclaim any employer NIC, as a result of worker being reclassified as a deemed employee of the engager, any repayment is paid on to the engager (although a typical PSC with one worker is unlikely to be paying employer NIC).

If you would like to discuss any elements of IR35, please reach out to Oliver Bull or your usual Evelyn Partners contact.

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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.