HM Revenue & Customs (HMRC) has confirmed it could have a legislative solution to the long-standing issue of it over-collecting tax in instances where organisations have fallen foul of the IR35 rules by April 2024.
The government tax collection agency has come under growing pressure in recent years to address this issue, which originates from the fact that when calculating how much tax a non-compliant organisation must pay, HMRC fails to take into account the corporation and dividend tax the contractors employed by these entities have already paid.
In situations such as this, the affected contractors are entitled to claim back any tax they have already paid, and HMRC has introduced notification procedures so it can contact any individuals and make them aware of what they are owed.
The Institute of Chartered Accountants in England and Wales (ICAEW) wrote to HMRC in August 2020 to raise concerns about this issue, while a number of other entities – including the National Audit Office (NAO) and the Chartered Institute of Taxation – have called on the agency to rectify the situation.
HMRC has now launched a consultation that is seeking feedback from contracting market stakeholders on its proposal to introduce a legislative tweak to the IR35 off-payroll working rules that would allow HMRC to set off taxes already paid by contractors against the employer’s subsequent Pay-As-You-Earn (PAYE) liability.
“This would potentially work in a similar manner to existing provisions in the PAYE Regulations 2003 (SI 2003/2682), that can allow the setting off of taxes already paid in certain circumstances where HMRC discovers that a directly engaged worker has been incorrectly classed as a self-employed sole trader instead of employed for tax purposes,” the consultation document states.
In a December 2022 report by Computer Weekly, HMRC said it had a “potential” legislative solution to the issue in the works, but no further details – including when it might be made public – were forthcoming at the time.
The prospect of it, though, was mentioned in a report from HM Treasury, where HMRC further stated that – in the meantime – it was “continuing to review and refine” its processes for notifying contractors about making tax overpayment claims.
However, the HMRC consultation document states that, if a decision is made to take the above proposal forward, it would come into force from 6 April 2024, and its powers would be retrospective.
“The intention is for the policy to apply to Income Tax and NICs [National Insurance Contributions] liabilities assessed on or after 6 April 2024, which arise as a result of an error in operating the off-payroll working rules in respect of deemed direct payments made from 6 April 2017, when the public sector reform was introduced,” the consultation document stated.
“This would replace the process whereby HMRC seeks to notify workers and their intermediaries regarding a potential entitlement to claim a repayment of taxes overpaid.”
In a statement to Computer Weekly, Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, said – given the consultation is only due to last eight weeks and contains only a single solution – HMRC is looking to move quickly on this issue.
“Whilst this is labelled a consultation, the speed and narrow focus of the single solution reads like an announcement. The short consultation window of only eight weeks, followed by a response later this year, is a clear signal that the fix will be happening in the next Finance Bill [for 2024],” he said.
“Firms currently under HMRC’s radar can take massive comfort that the plan is for the offset capability to be retrospective, all the way back to April 2017. This will mean any bills that have already been issued, and not settled, can now be reduced by approximately 75% – to align with the correct amount of tax that should be paid.”
Seb Maley, CEO of contracting authority Qdos, described the over-collection of tax by HMRC as “morally wrong” and said it was an issue the government should have acted to resolve a long time ago.
“Westminster knew this was a problem some time ago, but has done nothing about it,” he said. “The double taxation of IR35 gives needlessly risk-averse businesses another reason not to engage contractors – because if they’re found to be non-compliant, HMRC will over-tax them.”