Government launches consultation into IR35 double taxation issue

The Government has announced a new consultation into a ‘double taxation’ issue which occurs when a client determines the IR35 status of a contractor incorrectly, and both the deemed employer and the contractor may end up paying the same tax twice.

Background to IR35, Off Payroll and the ‘double taxation’ issue

The original IR35 rules

In 2000, the IR35 rules became law. This tax legislation dictates that an individual working in a manner similar to that of an employee must pay taxes in the same way as an employee, despite working through their own limited company (the intermediary).

Initially, it was the responsibility of the worker’s intermediary to decide if they were working in a manner akin to an employee and therefore subject to the rules.

However, HMRC believed that there was a growing trend of non-compliance with the original IR35 rules.

Off Payroll Working (IR35 reform)

As a result, the government implemented off payroll working reforms in 2017, starting with clients in the public sector, and later extended to medium and large-sized clients in the private and voluntary sectors in 2021.

These changes transfer the responsibility for determining employment status and ensuring appropriate tax and National Insurance payments are made to HMRC from the worker’s intermediary to the client hiring them.

If an end-client is subsequently found to have determined the employment status of a contractor incorrectly, the deemed employer (which could be the client or an agency further down the labour supply chain) becomes responsible for any income tax and NICs that should have been deducted from the contractor’s income had the correct determination been made.

The double taxation issue

In some cases, the contractor may already have paid tax and NICs on the same income, on the assumption that they were outside IR35. As a result, HMRC may end up collecting additional tax  ‘double taxation’.

The current off payroll legislation does not permit HMRC to offset the tax and NICs already paid by the worker and their intermediary against the PAYE liability of the deemed employer.

Instead, workers and their intermediaries who have already paid taxes and NICs on income that should have been subject to the off-payroll working rules may be entitled to a refund for overpaid amounts.

What is the aim of this new consultation?

This new HMRC consultation seeks feedback on a new solution which would introduce new legislation to apportion the Income Tax and NICs liability between the client and the worker by estimating a set-off for tax and NICs already paid by the worker and their intermediary.

The consultation will run for 8 weeks from 27th April 2023 to 22nd June 2023.

Assuming that a solution is found to address the double taxation issue, it is unlikely to take effect until April 2024, although redress is expected to be available – retrospectively – for overpaid tax dating back to 2017.

You can read the full text and how to get involved here.