Off Payroll taxation on personal service company (PSC) contractors has created a real headache for the recruitment sector for some time. The impact of the regulation – which APSCo has long highlighted as unfit for the modern world of work – has been significant. There has been a decline in the number of workers choosing to operate as a contractor due to the complexity of the regulations and far too many employers have taken the ‘play it safe’ approach, choosing to avoid engaging contractors or adopting ‘blanket Inside IR35’ approaches.
While there are a number of issues APSCo has with the regulation itself, we welcomed the recent consultation into introducing a set off mechanism which we have been calling for since 2021 and the introduction of the rules into the private sector.
Preventing double taxation
By means of explanation, the proposed set off would stop the double taxation issue that staffing firms feel the brunt of currently. As it stands, HMRC receives tax payments from an outside IR35 contractor through PAYE, NICs and Corporation Tax. In the event of a status reclassification of an assignment by HMRC, it will then claim PAYE, employer and employee NICs on the full contract amount from the deemed employer, often a staffing company. HMRC have recently introduced a mechanism so the contractor may be able to claim overpayment relief – essentially a tax refund – to avoid double taxation. However, that means a contractor may effectively pay no tax on an assignment and there is currently no such mechanism for payments that are made by the deemed employer.
HMRC’s proposals set out in its consultation to introduce a set off mechanism will address this issue, which is a success for APSCo and the broader sector following such a long period of engagement with HMT ministers and HMRC on this issue. The final decision by the Chancellor on these proposals is likely to be announced this autumn, and we hope will be implemented in the next tax year.
If the current proposals are enacted, an estimation of the taxes already paid by the contractor will be set off against the taxes due on a reclassification. This is a fairer outcome, although estimating the taxes will be a complex task for HMRC.
HMRC intend to give the contractor a right to appeal and depending on the grounds for appeal from parties in the supply chain, the worker and the intermediary could delay the process for the staffing company by filing appeals.
As a means of demonstrating this point, consider the fact that HMRC’s estimation of the amount to be set off will be complex and may be hard for the worker to understand. If an appeal ground is that the worker thinks “the amount of the tax and NICs to be set off is incorrect” then this could lead to many appeals unless the grounds are tightly worded. Given that the worker and intermediary do not suffer detriment because of this change, we think they should only be able to delay or stop the process in limited circumstances.
The need for clarity and transparency
The set off currently set out in the proposals is not expected to be retrospective. This means any implementation may be complex: potentially zero tax payments for the worker (if they claim a refund) prior to the expected go live date of 1st April 2024 and then the set off mechanism post 1st April. This creates confusion in what is already a complex issue for the supply chain and we hope HMRC will be clear about its treatment of open compliance cases as of 1st April 2024.
In order for HMRC to accurately calculate a set off there will need to be data transfer and transparency across the supply chain.
Some, but usually not all, of this required information will be collected by a recruiter for the purposes of the quarterly intermediaries’ reporting and for pay and bill purposes. For example, either the worker’s date of birth or the worker’s NINO would be collected, but not both. If the data required in the report is expanded by HMRC in order to collate the data required for the set off, and is used as the primary source, then this would be relatively easy for recruiters as they have a statutory obligation to collect the information and pass this up the chain to the outsourcing partner if applicable. If there is no statutory obligation to collect this, then many workers will be disinclined to supply this confidential personal data, making it difficult for HMRC to apply the set off.
Recruiters may no longer have current contact details for the worker or intermediary if the reassessment of status happens long after the event. Data collection is fundamental to the success of the “set off” determination and in order to work in practice, either the client, the outsourcer, or the recruiter should have a statutory obligation to collect this data prior to the start of an engagement to prevent individuals withholding information and to ensure recruiters aren’t unfairly disadvantaged.
Next steps
The consultation closed back in June, and it is expected that the results will be made available later in the year with draft legislation. If the Government decides to proceed with the change then it is likely to come into effect in the next financial year. We hope that the issues we have highlighted will be addressed in final legislation and guidance.
Certainly this is a change for recruiters to be aware of and factor into their operational reviews for 2024.
