What lies ahead for double taxation?

How might HMRC's approach to the issue of double taxation impact contractors?

Launched by the Government on April 27th, an 8 week-long consultation period seeks to address the issue of ‘double taxation’. In short, double taxation refers to instances where an incorrect status determination is made by a business and HMRC fails to factor in the tax already paid by the contractor when issuing the business in question with a tax bill, resulting in double taxation.

The consultation, which ends June 22nd, appears a move in the right direction by HMRC as it allows contractors, agencies, and hirers to give their opinion on the issue. However, with a proposed implementation date for changes fast approaching, April 2024, will the outcome of the consultation and the input of the industry see the light of day?

 

How is the system functioning now?

If a private or public sector organisation is subject to an enquiry by HMRC and it is found that a liability for incorrect determinations exist, HMRC would issue an assessment for the tax and national insurance which should have been paid.

In the pre-reform version of IR35 (Chapter 8), HMRC would then offset the tax already paid by the contractor. This was a straightforward exercise given the tax already paid and the tax liability sat in the same place. The reformed rules, however, shifted the liability up the chain to the ‘fee-payer’, creating a gap between these two points.

 

Why isn’t this working?

As things stand, the ‘fee payer’ would face an assessment on the gross amount paid to a PSC (or multiple PSCs) and there would be no means to take the PAYE, NIC corporation tax and dividend tax already paid by the contractor into account.

Technically, contractors are able to claim a refund for the tax and national insurance contributions they’ve paid should their previously deemed ‘outside’ engagement be found by HMRC to be inside IR35. This leaves the rather bizarre scenario of the ‘fee payer’ having an inflated liability, with the contractor effectively having had their income tax free.

 

So, what are HMRC likely to implement instead?

We are likely to see the introduction of tax offsetting. Wherein the taxes already paid by a contractor are offset against any tax or national insurance contributions that result from the reclassification of a previously ‘outside’ engagement as inside by HMRC.

This offsetting approach would be a step in the right direction and reflects other tax legislations which take a similar approach. It begs the question, why hasn’t this been done sooner?

 

How could offsetting affect contractors?

In the event that HMRC decide that tax can be offset, the contractor would be unable to make a claim for the repayment of the tax and national insurance contributions they’ve previously paid for that engagement. Most contractors, however, will understand that the opportunity to reclaim such tax made little sense, even if it would have been an unexpected benefit. However, the contractor will be allowed 30 days in which to appeal the decision. We don’t know yet how exactly this process will work in reality.

Contractors will also see the indirect benefit that this amendment will likely have. The introduction of offsetting will likely lead to an uptake in the use of contractors working in outside IR35 roles by businesses who as a result of the new process are likely to be less deterred from making use of an industry of highly-skilled and flexible workers.

Qdos CEO, Seb Maley, offers his opinion:

“This is an issue which has existed since the implementation of reform in the public sector in 2017. Numerous pleas have been made to HMRC and the Government to fix the problem, and we are thankful that it finally appears to have been addressed. Recent cases have shown that it is entirely possible to engage contractors outside IR35, and the reduction of potential liabilities from this measure should provide further reassurance to businesses in this regard”.