Off-payroll labour - Fairness in disputes moves a step closer

HMRC is consulting on proposals to rectify what many see as an unfair position when it investigates off-payroll labour errors.
 

The basics

Under the off-payroll labour rules updated in 2017 for public sector engagers and 2021 for all private sector organisations, it is the engager who must assess the status of the worker and, if they meet the test of being a deemed employee, deduct and pay PAYE and NIC on the contract.

If an engager fails to do this or (rightly or wrongly) does not believe the worker is a deemed employee, it is the worker and their personal service company (PSC) that will instead pay and any tax and NIC due on their contract profits.
 

Current unfairness

Where HMRC investigates an engager’s compliance record and finds that the engager’s assessment of a worker is incorrect and that the worker should have been classed as an employee, it is the engager that HMRC will pursue for the PAYE and NIC that should have been deducted. In most cases where a worker is recategorized, corporation tax, income tax and NIC will already have been paid by the worker on the contract amount. However, this cannot currently be taken into account in assessing what the engager must then pay - so HMRC will end up with two lots of tax and NIC on the same contract payment.

All that HMRC can do at present, is try to get in touch with the worker and encourage them to correct their tax return and reclaim overpaid tax. This leaves engagers potentially paying tax that has already been paid and then trying to collect it from the worker.
 

Proposals for change

Issues over employment status stretch much further back than the introduction of IR35 and a similar problem has arisen historically where individuals who claim to be self-employed are later found to be employees (triggering a PAYE and NIC liability for the employer). In such cases, HMRC already has the discretion to direct that the employer does not need to pay PAYE and NIC where the individual has already done so through their personal tax return.

It seems only logical to extend this discretionary power to cases of deemed employment where the worker has a personal service company. In its consultation, HMRC is proposing to allow the set-off the appropriate proportion of the following to be allowed against the engager’s corrected PAYE and NIC liability:

• Corporation tax paid by the worker’s PSC
• Income tax paid by the worker on their PSC salary and dividends
• NIC paid by the worker.
   

It should be noted that NIC paid by the PSC would not be allowed to be offset, HMRC says this is because the PSC has a separate legal identity to the worker, although HMRC would allow such payments to be reclaimed by the PSC.
 

Future off-payroll challenges by HMRC

While these proposals are welcome, it will take some time for a legislative process to achieve such set-offs with multiple practical issues to resolve. For example, in our response to HMRC we have encouraged them to reconsider why the NIC paid by the PCS should not also be off-set against the engagers' revised liability after an HMRC challenge - a distinction here seems unnecessary and unfair. Read BDO’s response to the consultation.

Of course, even where taxes are set-off in the future, the engager is still likely to face some liability for failing to categorise workers correctly and potentially large penalties for that compliance failure. As ever, all organisations should ensure that they are ready for a review of their off-payroll workers by HMRC.