HM Revenue & Customs (HMRC) will have a solution in place by April 2024 to solve a long-standing issue that has repeatedly seen the government agency accused of over-collecting tax from non-IR35-compliant public sector bodies, it is claimed.
The issue relates to the fact that when HMRC calculates how much tax a non-compliant public sector organisation owes, it fails to factor in the amount the affected departments’ contractors may have already paid in corporation and dividend tax.
This means HMRC is not offsetting the total amount of tax against any tax the departments’ contractors may have already paid, because there is no mechanism to do that within the IR35 legislation in its current form.
It is possible, however, for the affected contractors to claim back the tax they have already paid out to HMRC once the public body they work for has accepted that its IR35 status determinations are incorrect, although it is unclear how many individuals have pursued this.
Dubbed the “settlement offsets issue” by contracting market stakeholders, HMRC has found itself under growing pressure over the past several years to find a workaround, with The Institute of Chartered Accountants In England and Wales known to have written to HMRC as far back as August 2020 to outline its concerns about the matter.
Having already confirmed that a “potential” legislative solution to the problem was in the works, as reported by Computer Weekly in December 2022, a public sector-focused tax consultant has published a LinkedIn blog claiming HMRC has assured them the fix will be introduced in April 2024.
Angela Ferguson, head of employment taxes at public sector tax consultancy PSTAX, said in the blog that HMRC had informed her that it was going to let “current off-payroll working (IR35) audits/compliance checks/disclosures benefit from the proposed offset changes to be introduced in April 2024”.
Ferguson added: “They [HMRC] are offering the clients the opportunity to pause their compliance check if the case meets certain conditions. The employer can then benefit from the proposed offset changes coming in from April 2025.”
She also went on to say that this could also apply to errors made as far back as April 2017, which is when a reform of how the IR35 legislation works in the public sector was introduced.
These changes saw contractors cede control for determining how they should be taxed – depending on the work they do and how it is carried out – to the public sector bodies that engaged them. Similar changes were rolled out to the private sector several years later.
These organisations were told they must individually assess each contractor they engage with to determine whether the work they do means they should be treated as an employee for tax purposes (known as an inside IR35 determination) or taxed in the same way as an off-payroll worker (outside IR35).
Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, is among a number of contracting market stakeholders that have hit out at HMRC on numerous occasions for failing to take action on the settlement offsets issue quickly enough.
“HMRC dragged their heels on this issue for three-and-a-half years and refused to budge on their position at an IR35 Forum meeting in September 2021. It’s only when a large group of us involved MPs, ministers, select committees and the National Audit Office that the Treasury finally acknowledged the flaw, announcing in December 2022 that the issue would be resolved. We should all give ourselves a pat on the back,” he said.
“For clients and contractors, it is essentially business as usual. The changes mean that if they get an IR35 status determination wrong, they won’t be hit with a disproportionate tax bill compared to the actual amount of tax underpaid. It’s unlikely this would have happened, but without the clarification in statute, the tax tribunals would have needed to resolve the issue.”
And, if as expected, the change is introduced in April 2024, Chaplin is of the view that this could lead to a large-scale shift in how organisations in both the public and private sectors approach the hiring of contractors, especially among organisations that responded to the shift in responsibility for determining how contractors should be taxed by introducing hiring bans or ruling that every contractor they engage must be hired on an inside IR35 basis.
“The removal of this ‘double-taxation’ flaw means that where firms get the determination wrong, the extra tax payable will, as a rule of thumb, be roughly equal to the employer’s National Insurance (NI) bill that would have been paid had the contractor been on-payroll, instead of a bill four times that,” he added.
“The flaw was one reason many firms may have blanket banned the use of contractors, and this fix may encourage those firms to rethink their position.”
Computer Weekly contacted HMRC for confirmation and clarification of the start date for the potential settlement offset fix, and received the following statement in response.
“The fact we were looking at this is not new. We launched a consultation in April on introducing a set-off for deemed employers who face liabilities where there has been non-compliance with the off-payroll working rules,” a spokesperson for HMRC said.
“We are still considering the feedback and plan to publish a response by the end of the year. In the meantime, we are writing to a small number of customers with open compliance enquiries which are approaching settlement, informing them that, subject to certain conditions, they may be able to pause their settlement whilst this remains under consideration.”