What should you expect from the IR35 Consultation?
A little over three months ago, the UK government announced it would conduct a consultation on off-payroll working (IR35) rules.
The long-overdue consultation shut its window for submissions on the 22nd of June, and was aiming at identifying a possible change that would allow HM Revenue and Customs (HMRC) to account for taxes that have already been paid by an individual when calculating their PAYE liability. However, the consultation was not seeking views on changes to the off-payroll working legislation or on how employment status is determined.
With this in mind, we have created this article to highlight what you should realistically expect from the consultation. We will also provide a rough timeline of when legislative changes (if any) would be likely to appear.
The Overtaxation Dilemma
Before highlighting what to expect from the consultation, it’s a good idea to first familiarise ourselves with why it’s occurring in the first place.
HMRC argues that the consultation was aimed to promote “fairness” within the tax system by addressing a glaring oversight of the current legislation.
That oversight in question (which, incidentally, is completely of HMRC’s own doing) meant that if in instances where HMRC found a client to have made errors in determining the employment status of its off-payroll workers, then the fee-payer would become liable for Income Tax and National Insurance Contributions (NICs). The problem however is that HMRC doesn’t factor in the tax that has already been paid by the contractor, resulting in double taxation,
According to HMRC, the current legislation “does not allow HMRC to set off amounts of tax and NICs already paid by a worker and their intermediary against the PAYE liability of the deemed employer.”
At the start of the consultation, HMRC stated that they are “considering the available options” to ensure the correct tax and NIC are being collected overall when errors are found. HMRC also argue that they have been “looking at how it can address the immediate issue of over-collection by working within its existing powers and laws whilst exploring whether changes should be made to the legislation.”
Simply put, then, this consultation has been brought forward by HMRC, who have seemingly, finally admitted what we have all known for some time — The system is broken and is in dire need of repair.
The current barriers in place
HMRC states that they are “currently unable to accurately determine the amount of tax that has been paid by a worker and their intermediary.”
The customs body argues that accurately determining the amount of tax left to owe would require “further investigation of the worker’s [tax affairs] and their intermediary’s tax affairs.”
HMRC argues that, as the affairs will be unique to each worker and depend on a myriad of factors (such as other revenue streams; the intermediary’s accounting period; the number of shareholders, etc.), this could all take a significant time to process. HMRC also argues that “undertaking this level of investigation can be administratively burdensome, resource intensive and costly for HMRC, deemed employers and workers.”
Forgive my cynicism, but HMRC already has all the available data they need to undertake a review to find whats been paid by the worker. HMRC has a record of the tax already being collected, and once the correct status has been determined, they are also able to calculate the total amount of tax that should have been paid.
In regards to their argument about “further investigation” and the subsequent cost and processing time, this is an issue entirely of their own doing and is a process they would have had to undertake regardless of HMRCs proportionality argument.
Further exacerbating the theory that HMRC are trying to solve an issue entirely of their own doing, HMRC theorises that they could calculate the amount of tax already paid on a reasonable basis using “readily-available information.”
In practice, this means that HMRC can use assumptions and best judgement to estimate the amount of tax paid by a worker and their intermediary, representing tax paid on off-payroll working income.
HMRC ascertain that they could create a solution could work similarly to existing provisions in the PAYE Regulations 2003 (SI 2003/2682). In these regulations, HMRC allows the setting off of taxes already paid when a directly engaged worker has been incorrectly classed as a self-employed sole trader instead of employed for tax purposes.
Part of this proposed solution involves notifying customers of potential overpayments where applicable. Once the notification has been delivered, the fee payer cannot amend their tax returns to claim any repayments for the amount already paid (thereby preventing a potential double tax relief).
To make the system work, HMRC states that the fee payer would have a right to appeal under certain conditions (i.e. the incorrect amount of tax being set off, or they have yet to receive a payment from their deemed employer in the tax year). However, the fee payer would not be able to appeal on the basis that they disagree with HMRC’s conclusion regarding their status.
What happens next?
Now that the deadline for submitting comments and feedback to the consultation has passed, it’s a good time to reflect on what happens next and outline what you should realistically expect to see as a result of this consultation.
Unfortunately, however, one thing that seemingly wasn’t discussed in the consultation is retrospective payback.
As alluded to above, HMRC already possesses a wealth of data on every taxpayer. Yet, despite this and the fact that we have previously exposed another HMRC shortcoming, there was no acknowledgement from HMRC that they may have made mistakes under the current system. Furthermore, HMRC has failed to clarify that they will retrospectively reimburse the taxpayer as a result of previous overtaxation.
However, HMRC states that the consultation will inform decision-making on how best to address the current overtaxation issue. Unsurprisingly, HMRC gives no timeline beyond mentioning that a summary of responses will be published later this year.
In order for HMRC to get any proposed legislation change to become law, it must, of course, pass through parliament.
Once the bill has a slot in the legislative programme and has been cleared for introduction to parliament by a meeting of the Parliamentary Business and Legislation Committee, it can then be introduced to the House of Commons or the House of Lords. Following this, the bill will have to go through three separate readings, along with a committee and report stage. Once all of the above has occurred, the bill must then be agreed upon by both Houses and given Royal Assent in order to become an act and, therefore, a law.
We know that the House of Commons and House of Lords return from summer recess on the 4th of September, so assuming that any changes as a result of the consultation are to become law in the next financial year, we should expect to know more about the potential changes towards the end of September or October.
Interested in understanding more about HMRC and how you can protect yourself from IR35 legislation? Get in touch with our friendly team today to learn more.