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Addressing the impact of double taxation

Alison Roberts

Alison Roberts | Legal Director

Wednesday 24th Jan, 2024

The publication last November of the draft Finance Bill 2023, following Chancellor Jeremy Hunt’s Autumn Statement, is a memorable reversal of an injustice affecting contractors. The new legislation will prevent the inequity of double taxation that impacted certain parties in the supply chain.

Getting an IR35 status determination wrong

If HMRC successfully determine that the end user, or fee payer has incorrectly determined that a contractor is outside IR35, then PAYE and employer and employee NICs potentially going back 6 years could be payable together with interest and penalties.

Depending on the supply chain involved, this liability may fall upon the end user, an employment business or fee payer (as appropriate). Under existing tax rules that person or entity has to pay over the duties in full without taking into account any tax or NICs paid by the contractor’s intermediary.

The practical effect of the existing tax rules

Often that intermediary will be a limited company which has paid corporation tax on the fees paid by the end user. The intermediary would be able to claim a refund from HMRC; whilst end users have been left trying to recover PAYE and employee NICs arrears from the intermediary by relying on contractual indemnities (if they existed).

The employment industry was involved in significant, and ultimately successful, lobbying of government to correct this inequity by the introduction of an offset arrangement to avoid the clear ‘double taxation’ involved.

What the draft legislation will provide

It will allow end users/fee payers to offset an amount equal to HMRC’s best estimate of the corporation tax paid by or assessed on the intermediary in respect of the fees received from the end user against arrears of PAYE/NICs assessed after April 2024.

Following the re-classification of their employment status, a person won’t have any further tax to pay but neither will they be able to claim a refund.

What years will it cover?

The legislation will permit offsets for arrears going back to April 2017 when off-payroll working rules in the public sector were first introduced.

Are there any ongoing benefits of the new rules?

For a ‘deemed employer’ end user, following an incorrect status determination there is the comfort of knowing that corporation tax, income tax and NICs paid elsewhere on the same income should be offset to reduce their ultimate liability. This positive has to be tempered by the possible difficulty which HMRC may face in establishing what tax has actually been paid by the intermediary!

For end users involved in ongoing compliance checks with HMRC involving incorrect status determinations, it is an opportunity to mitigate the final settlement liability. Indemnity clauses could still be relied upon, although the ultimate liability could be reduced by means of the new offset arrangements.

Perhaps end users who have placed blanket bans on the use of limited company contractors may take a more objective view on their use in future since their financial risk is reduced. This is certainly the hope for those wanting to work on outside IR35 roles, however time will tell on how the sector responds to this change.

Related article - Deliveroo delivers in the Supreme Court

Gig economy giant Deliveroo’s stance on the status of its riders was upheld in the Supreme Court last week. Although not an IR35 case appeal, the Court’s judgement sheds additional light on some important principles in determining employment status.

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