HMRC faces pressure to address issue of double taxation by introducing offset mechanism to off-payroll rules

Leading trade body, ASPCo, have recently made their stance clear on the issue of double taxation, highlighting that a change to the Off Payroll rules is necessary to ensure the fair treatment of the recruitment industry.

As things stand, if a contractor’s engagement is found to be caught by the Off Payroll rules, the fee-payer (often a recruitment agency) will be liable for the full amount of tax and national insurance which would have been payable had the contractor been an employee. This liability will be based on the gross fees paid to the contractor, despite the fact that the contractor would have paid Corporation Tax, PAYE and dividend tax on their income.

The pre-reform version of IR35 (chapter 8) allowed a direct offset of these taxes, meaning the gross liability would have been reduced significantly based on tax already paid. The reformed rules in chapter 10, however, do not contain any such mechanism.

The issue of double taxation doesn’t impact recruitment businesses alone, whether worker or engager, both parties could be paying more than they owe. Let’s take a look at the current situation before receiving some insights from Qdos Head of Tax, and former HMRC Tax Inspector, Nigel Nordone.

An industry calling for change

We’ve been seeing calls for HMRC to address double taxation since IR35 reform in the public sector was first introduced on 6 April 2017. Now, it appears that there is a renewed push for change with APSCo and other industry specialists taking the lead.

Tania Bowers, a Global Public Policy Director at APSCo, and a member of the HMRC Intermediaries and Employment Forum, has made a statement regarding double taxation.

In that statement she highlights that changes are required to ensure Off Payroll “doesn’t unfairly penalise both recruitment firms and highly skilled contractors” and reinforces that APSCo “continue to work closely with HMRC on changes to the rules including potential solutions to the double taxation that is inherent in the current rules”.

It was the hope of many that the situation would receive attention during the Spring Budget, but the problem remained unaddressed.

Qdos Head of Tax, Nigel Nordone, unpacks relevant case law

The issue of double taxation is not new, and was subject of a tax case in 2005, Demibourne Ltd v HMRC (2005).

This case concerned an employer who was engaging a worker (Mr Bone) on a self-employed basis, and who, following a HMRC investigation was deemed to be an employee of the employer. As a consequence of this incorrect employment status classification, the employer had failed to deduct PAYE on the employee’s income.

The case established the principle that where an employment relationship exists, the employer is responsible for deducting tax from payments made in accordance with the PAYE regulations. If the employer has failed to deduct PAYE from the employee’s salary, then HMRC can recover any unpaid PAYE from the employer, even if the employee had paid tax via self-assessment on the same income.

As part of the Demibourne case, the employer argued that any tax and NIC paid by the employee via his self-assessment should be offset against the PAYE liability that had arisen from his reclassification as an employee.

Following the employer’s arguments regarding double taxation, the presiding judge in the case stated: “The parties [Demibourne and HMRC] are encouraged to arrive at a negotiated settlement to take account of the tax that Mr Bone has already paid.”

HMRC published guidance on the consequences of this case on 16 September 2008 and a link to the regulations pertaining to setoffs can be found here - Regulation 72F ITEPA 2008  

Our stance on the matter of double taxation

Nigel Nordone offers his insight:

“Whilst the issue of double taxation has been around for a long time, it is one that HMRC urgently needs to address, as it is clearly unfair on all parties both under the off-payroll rules Chapter 10, part 2 ITEPA 2003 and IR35 Chapter 8, part 2 ITEPA 2003.

HMRC have just announced the beginning of a consultation to address the issue of double taxation. The consultation, running from 27th April to 22nd June 2023, aims to evaluate views on potential options and find a solution to the ongoing problem faced by the industry.

The main takeaway here is that HMRC appears to be listening and we can only hope that they will continue to listen, and that positive change is on the way.