IR35 set-off mechanism finalised and in force from 6 April 2024

The Revenue has completed its consultation on the new IR35 tax liability off-setting legislation. The debate is over, analysis done, mechanism finalised, and it will be coming in with effect in two weeks’ time on 6 April. We’ll speak to a tax expert about how it’s relevance to end user clients.

A reminder. This is the mechanism designed to avoid the problem of double taxation, enabling end user clients to offset tax already paid by the individual's PSC in circumstances where HMRC has found that a contractor has been wrongly operating outside IR35. So, a way to prevent end user clients overpaying tax where HMRC decides there has been a misclassification under the IR35 rules and they bring an individual back within scope of the rules.

This is an issue that affects large and medium sized businesses and, as the government spells out on its website, it will be of interest to HR managers and those who deal with recruitment processes and payroll. 

Three weeks ago we heard from tax expert Penny Simmons talking about how she expected the set-off mechanism to work and the likely impact of it. We now have it in its final form so let’s hear again from Penny. Earlier she joined me earlier by video link with an update:

Penny Simmons: “Okay, so the set of mechanism, I think, originally when it was announced, was kind of thought of as this would be the solution to businesses if they face challenges from HMRC as to what they may or may not have to pay under IR35 if the Revenue disagrees with the determinations. It was thought of as a great solution to us because, ultimately, as long as our contractors have paid their own taxes then we get a credit for the tax that our contractors have paid. So, actually, it shouldn't be too bad from a numbers perspective, we're not talking about reputational risks here, but from a numbers perspective it shouldn't be too bad as long as our contractors have already paid their own taxes so they are fully tax compliant. Now, what the set-off mechanism, and we've talked about this before, Joe, what the set of mechanism provides, and what it mandates, is that the Revenue and the engager, the businesses, will have to be able to identify specific contractors so that the Revenue can then identify what tax those specific contractors have paid and the problem that this will undoubtedly pose to large businesses with significant populations of workers is it makes it very difficult to make estimates of large populations of taxes that likely have been paid, but rather where there are large populations of workers, businesses are being required to identify specific workers in order to say to the Revenue, okay, these are the specific workers we've identified where you're challenging the status determination for those workers so that the Revenue can go off and identify the taxes that have been paid by those workers. Now that will be very difficult where businesses are dealing with significant populations of workers and trying to use sampling exercises.”

Joe Glavina: “Given what you’ve said, Penny, should employers who are facing challenges by the Revenue conduct a review of their status determinations?”

Penny Simmons: “Oh, well, Joe, I’d definitely be expecting businesses who are faced with challenges by the Revenue to review and really look, if you like, at status determinations that were made for workers. I mean that, I would say, is a given. As we discussed countless times on these programmes the test for determining employment status for tax purposes is a difficult one. It's based on a series of factors and in many cases different people could come to different answers because there are a number of factors and circumstances that you're being expected to look at in the round. Really, Joe, and we have talked about this before, and I probably have said this countless times on programmes like this but the key, I think, is to not get in a position where the Revenue is questioning determinations of workers. So, really to make sure, and my advice to businesses is to make sure, that you have robust processes in place to deal with IR35, to be taking reasonable care to be making determinations for any workers who are engaged through PSCs, personal service companies, and to ensure that you make those determinations robustly, and think about them, and it really engage with those determinations to minimise the risks of a Revenue challenge starting in the first place.”

Joe Glavina: “You are advising clients on IR35 compliance every day, Penny, and it’s a complex area, obviously, and this is tax we are talking about so HR viewers might not necessarily see this as relevant to them. How involved is the HR team in this in your experience? How involved should they be?”

Penny Simmons: “So regularly, I would say that the HR is quite integral to that work. Now every business is different, and businesses are structured differently, but in pretty much in all cases that I work with HR are involved. Sometimes businesses will be structured whereby it's the procurement function that manages off-payroll workers rather than HR, and HR kind of is more involved where they are actually employees, so they form part of a business's headcount. But to HR managers listening to this programme who have no idea what their business’s IR35 policies and processes are, I would say to you, you're listening to this programme, go and find out what your business’s IR35 processes are, engage with whoever it is in the business that is managing IR35 compliance to make sure that there is a robust process in place for identifying PSC contractors in your supply chain, and then making those determinations using CEST which is the Revenue’s tool for checking employment status for tax purposes, and potentially judgment as well because it's grey, and making sure that, wherever possible, you are in a position to strongly be able to advocate why you have made the determination as to whether a contractor is inside or outside the IR35 rules.”

The new IR35 set-off mechanism comes into effect from 6 April. The Income Tax (Pay As You Earn) (Amendment) Regulations 2024 were laid before parliament on 11 March and will implement the changes by amending the Income Tax (Pay As You Earn) Regulations 2003. The Revenue has published detailed guidance on how the mechanism will work – we’ve included a link to that guidance in the transcript of this programme.

LINKS
- Link to HMRC guidance on the IR35 set-off process