In a new IR35 update HM Revenue and Customs (HMRC) is currently seeking input on proposed legislation and guidance that outline the circumstances and methods by which a deemed employer’s Pay As You Earn (PAYE) liability could be lessened by the tax and National Insurance contributions (NIC) remitted by a worker and/or their intermediary.

In accordance with the off-payroll working (IR35) regulations of 2017 and 2021, it is the responsibility of the client to ascertain whether the worker would have been considered an employee for tax purposes if they hadn’t been engaged through an intermediary, such as their personal service company.

In instances where it is subsequently determined that a worker, initially treated as self-employed, should have been classified as employed by default, the deemed employer is required to settle the income tax and NIC obligations that would have been due had the worker been treated as an employee. Presently, the tax and NIC payments made by the worker and their intermediary cannot be deducted from the deemed employer’s PAYE liability.

Legislation included in the Finance Bill 2023-24 (clause 17) empowers HMRC to deduct the tax paid by the worker from the tax and NIC payments due from the deemed employer. This provision will take effect from 6th April 2024, with the specifics outlined in supplementary legislation. Draft supplementary legislation for tax and accompanying guidance on tax and NIC are currently open for consultation.

Key points of note are:

  • HMRC can only apply a set-off if it has received a tax return containing an amount of tax that appears to correspond to the deemed direct payment.
  • The amount eligible for offsetting will be determined by HMRC’s best estimate based on available information.
  • Class 1 primary, Class 2, and Class 4 NIC payments made by the worker may be offset against the deemed employer’s Class 1 primary NIC liability, but not against the Class 1 secondary liability.
  • Upon applying a set-off, HMRC will issue a directive notice to the worker, the intermediary, and the deemed employer or relevant party. This notice will detail the engagement to which it pertains, the relevant tax years, and the offset amount.
  • The worker and their intermediary will retain the right to appeal against the directive notice.

While new regulations for PAYE are necessary to account for income tax and corporation tax, existing NIC regulations can be utilised to account for already remitted NIC payments. Regulation 51 of the Social Security (Contributions) Regulations 2001 permits HMRC to treat incorrectly paid Class 1 primary and Class 2 NIC as contributions duly payable. Regulation 101 extends a similar treatment to Class 4 NIC.

The consultation period will remain open until 22nd February 2024. For help with IR35 and your taxes, contact us directly.