From 6 April 2024, HMRC is finally given the power to deduct tax and NIC already paid by a worker from the tax and NIC due from their deemed employer when the off-payrolling IR35 apply to an engagement. The new rules do not extend to an offset of the Employer's National Insurance Contributions (NIC).
Shortages of talent in the labour market indicate that engagement of sub-contractors is likely to be on the increase. The ability to offset Income Tax is important in situations where a deemed employer is considered by HMRC to be non-compliant by incorrectly treating an engagement as self-employment.
Taxpayers may be baffled to know that to date there has been no legislative means by which the relevant amounts of tax due to HMRC from the deemed employer can be offset by amounts already paid by the relevant intermediary or the worker. However, as this gave the potential for income to be taxed twice the more sceptical observer might note that this gave the government little incentive to remove this unfairness in the rules.
From 6 April 2024 the PAYE regulations may provide that:
- An amount can be treated as having been recovered from the payee and that amount not to be recoverable from the payer ('the deemed employer') where
- the deemed employer would otherwise be liable to pay an amount of PAYE as a result of a deemed payment to a worker, and
- an amount of income tax or corporation tax has already been paid or assessed in respect of income referable to that payment.
- The amount for offset will be the best estimate that can reasonably be made by HMRC by reference to a tax return for an amount of tax that appears to be related to the deemed payment.
- Deemed direct payments made on or after 6 April 2017 will be included.
Existing regulations for NIC can be used to account for NIC already paid. Class 1 Primary Contributions, Class 2 and Class 4 NIC paid by the worker may be offset against the deemed employer's Class 1 Primary NIC. Offset against the deemed employer's Secondary NIC is not allowed.
The changes in Finance Act 2024 amend ITEPA 2003 and allow HMRC to offset both income tax and NIC paid by the worker on salary or dividends or corporation tax paid by the intermediary against the deemed employer liabilities.
Useful guides
IR35
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
Off-Payroll Working: PSCs & Public Sector Engagers
The 'Off-Payroll Working' rules move IR35 and the responsibility to assess a worker's employment status and to deduct Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs) from a worker's fees, away from the worker's company to the End-Client in the labour supply chain.
Off-Payroll Working: PSCs & Private Sector Engagers
What is Off-Payroll Working? Who does it apply to? What are the rules?
