Back on the 27th April 2023, the HMRC launched an IR35 review in the form of a consultation to address the problem of IR35 and double taxation.
The consultation, entitled 'Off-payroll working (IR35) – calculation of PAYE liability in cases of non-compliance' is open until the 22nd June 2023.
IR35 Review
Unfortunately, the IR35 review will only address one of many flaws relating to IR35, that pertaining to the issue of double taxation. As we highlighted in a recent article, the IR35 rules are defective in many other ways, defects which the IR35 review will not even begin to the address.
A full explanation of what IR35 (aka the off-payroll working rules) is, is set out here and here.
The IR35 rules are designed to clamp down on what is referred to as ‘disguised employment’, where those who are in reality employees are made out to be self-employed contractors, with the objective of avoiding paying the additional taxes and national insurance contributions that come with being an employee.
With effect from the 6th April 2021, IR35 was extended to businesses with 50 or more employees in the private sector. This followed its earlier implementation into the public sector on the 6th April 2017.
Nevertheless, one of the problems created by the IR35 rules is that of double taxation in circumstances where there has been an initial incorrect status determination. That is, where a business has initially determined that the IR35 rules do not to apply to a contractor, but that later turns out to be incorrect, then by the time that the mistake has been discovered, the contractor may have already paid tax and NIC's whilst working outside of IR35.
However, once the mistake has been discovered, the business then becomes liable for the tax and NIC's. Nevertheless, HMRC do not offset the tax and NIC's that have already been paid by the contractor as, somewhat ludicrously, there is no meachanism for doing so. This means that HMRC end up collecting tax and NIC's twice on the same income. Despite HMRC and the Government being aware of this double taxation problem for many years, shamefully they have completely failed to rectify the injustices this has caused.
This creates additional problems in that self-evidently, the risks associated in ending up with a double taxation problem, mean that businesses become less inclined to use contractors in the first place
Proposed Solution
The purpose of the IR35 review is to address the problems caused by double taxation, and the hope is that a resolution will come into force in April 2024.
Within its IR35 review, HMRC are proposing to amend the IR35 rules to allow them to offset any taxes already paid by the contractor from any PAYE tax liability subsequently incurred by the business. Indeed, the IR35 review announcement states: "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 announcement adds that: "Under Regulations 72E-G of the PAYE Regulations, HMRC may make a direction that the employer is not liable to pay an amount of Income Tax due under PAYE where it appears to HMRC that Income Tax on the payment is likely to have been included on the worker’s Self Assessment tax return, or paid on account or deducted under the Construction Industry Scheme (CIS)."
Reaction
Commenting upon the IR35 review, the CEO of Qdos, Seb Maley, stated: "[The current system is] morally wrong. A consultation marks progress. In theory, it’s an issue which can and should be solved relatively easily too. Even so, I’m amazed that the government has refused to look into this until now. Westminster knew this was a problem some time ago, but has done nothing about it."
The CEO of IR35 Shield, Dave Chaplin, also welcomed the IR35 review. He stated: "Whilst this is labelled a consultation, the speed and narrow focus of the single solution reads like an announcement. [It] is a clear signal that the fix will be happening in the next finance bill 2024. The double-taxation flaw in the off-payroll rules was grossly unfair on businesses who were being threatened with tax bills more than four times the perceived underpayment of tax."
