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The Incoming Offset Rule: What Hirers and Contractors Need To Know

How will the offset rule affect contractors and their hirers?

In April 2024, a small but potentially significant change is being introduced to the off-payroll working rules, commonly known as IR35. This mechanism, designed to offset a double payment of tax, has the potential to make working with independent contractors more attractive to hirers.

What is IR35?

Since changes to the IR35 rules in 2017 and 2021, a hirer engaging an off-payroll worker is responsible for determining the employment status of the worker for tax purposes and for ensuring the right tax and National Insurance is paid to HMRC.

The hirer could be the business for which the work is being undertaken, or an agency further down the labour supply chain.

Why is the change needed?

Under the current rules, if the hirer is found by HMRC to have incorrectly determined its off-payroll worker to be self-employed, then the employer becomes liable for Income Tax and National Insurance contributions (NICs) that should have been deducted from the fee paid to the worker.

If the worker has already paid tax and NICs on the same income, HMRC may end up collecting more tax than is due.

What has happened so far?

The government launched a consultation in April 2023 seeking views on a potential legislative change to allow HMRC to account for tax and NICs already paid by a worker against the deemed employer’s Pay As You Earn (PAYE) liability.

Following feedback, the government announced in the November 2023 Autumn Statement that this legislative change would be introduced from 6 April 2024. Therefore a new power has been inserted into the Income Tax (Earnings and Pensions) Act 2003, putting the proposed legislation into law.

In January, HMRC opened a new technical consultation aimed at refining the legislation and accompanying guidance which closes on 22 February 2024.

How will it work?

From 6 April 2024, the liability for Income Tax and NICs arising from the deemed direct payment will continue to be the responsibility of the deemed employer. Where HMRC is satisfied that the conditions for an offset have been met and makes a direction, the liability of the deemed employer will be reduced by the offset to take account of Income Tax, NICs and corporation tax paid on the income from the OPW engagement by the worker or intermediary.

The offset will only apply following a HMRC compliance check into the application of the off-payroll working rules and to any determinations of tax arising or offered after 5 April 2024. This will only apply to tax which has been declared to HMRC via a corporation tax and self-assessment tax return and will be based on HMRC’s “best estimate” of tax paid in relation to any impacted contracts. HMRC will therefore need to be able to verify the tax details of the worker and their PSC.

How will it affect hirers?

Hirers who have visibility of their flexible workforces should be eligible for the offset, greatly reducing their tax liabilities in the event of an accidental incorrect assessment.

HM Revenue and Customs (HMRC) can only consider a offset where it is able to identify the worker and intermediary. This means that a client or deemed employer will need to provide certain information relating to workers and intermediaries to enable HMRC to carry out checks to ensure that tax returns have been submitted, and tax and National Insurance contributions (NICs) have been paid or assessed for the relevant periods.

As a minimum, HMRC will need the following information:

  • the worker’s full name or National Insurance Number (NINO)
  • the intermediary’s or partnership’s name
  • the intermediary’s Company Reference Number (CRN) or VAT Registration Number (VRN), where applicable
  • the partnership’s reference number, where applicable

If a client or deemed employer does not provide this information, or HMRC is unable to identify the worker and intermediary, a offset will not be given. This is because HMRC will not be able to confirm that relevant returns have been submitted and that tax and NICs has been paid or assessed.

Where HMRC can identify the worker or intermediary, and confirm returns have been submitted, the next step is to identify whether relevant tax and NICs has been paid in order to direct a offset.

If HMRC cannot identify an amount of tax or NICs which has been paid or assessed by a worker or an intermediary, a offset will not be given in respect of that worker or intermediary.

How will it affect contractors?

There should be very little change for contractors.

A contractor will not be able to make any claims for repayments of any tax that they have paid in relation to any impacted contracts. They will effectively continue to pay the same tax as they would do if the contract remained “outside” of the off-payroll rules.

The contractor will be notified of the “best estimate” and may appeal it if they did not receive the funds for relevant contract, no tax has been paid on such finds or the amount is incorrect. If a deemed employer disagrees with the amount of offset which has been calculated, it can provide evidence that a different amount of offset is due. HMRC will review any information supplied and consider amending the direction notice.

No offset will be given in respect of a deemed employer’s Class 1 secondary NICs liability (employers NIC). Instead, any Class 1 secondary NICs already paid by the worker’s PSC may be eligible for a repayment, which the PSC must claim. This is largely a moot point as typically PSC’s do not pay any or much by way of employers NIC so there will be little to none of it to offset. No offset will be given for any VAT paid.