Policy paper

Off-Payroll Working (IR35) — calculation of PAYE liability in cases of non-compliance

Published 22 November 2023

Who is likely to be affected

Individuals who provide their services through an intermediary, such as their own limited company known as a personal service company (PSC), and who would be employed if engaged directly.

Medium and large-sized clients, partnerships and individuals who engage people who work through their own intermediaries.

Public authorities and agencies who engage people who work through their own intermediaries.

General description of the measure

This measure gives HMRC the power to set off amounts of tax and National Insurance contributions already paid by a worker and their intermediary on income from engagements under the off-payroll working (IR35) rules against a subsequent PAYE liability of their deemed employer. This aims to address the potential over-collection of tax and National Insurance contributions in cases of non-compliance with the off-payroll working rules.

Policy objective

The objective of this policy is to address a potential over-collection of tax and National Insurance contributions by HMRC and resolve an unfairness in the tax system. This will be achieved by allowing HMRC to set off taxes estimated to have already been paid by the worker or their intermediary against a deemed employer’s subsequent PAYE liability, ensuring that the cost of the liability is shared more fairly between the deemed employer and the worker.

Background to the measure

The off-payroll working rules (commonly known as IR35) were first introduced in 2000. The rules set out that where an individual is working like an employee, they should pay tax like an employee — regardless of whether they are working through their own intermediary (for example, a PSC).

The government introduced an administrative reform to improve compliance with the existing rules, first for clients in the public sector in 2017 and then to medium and large-sized clients in the private and voluntary sectors in 2021. The reforms shift responsibility for determining employment status, and for ensuring the right tax and National Insurance is paid to HMRC, from the worker’s intermediary to the client engaging them. These reforms have been successful in tackling non-compliance. More people who are working like employees are paying taxes like employees — improving fairness in the tax system.

Under these rules, where a client is found by HMRC to have incorrectly determined a worker is outside the rules (for example self-employed) when they should have been inside (for example deemed employed), the deemed employer (which could be the client or an agency further down the labour supply chain) becomes liable for Income Tax and National Insurance contributions that should have been deducted from the fee paid to the off-payroll worker had the correct status determination been made.

Current legislation does not allow HMRC to set off amounts of tax and National Insurance contributions already paid by a worker and their intermediary against the PAYE liability of the deemed employer. Instead, where a worker and their intermediary have paid tax and National Insurance contributions on income that should have been subject to the off-payroll working rules, they may be entitled to claim a repayment for amounts they have overpaid. The current process results in the deemed employer bearing the full cost of the tax and National Insurance contributions liability.

This measure will benefit public authorities and businesses that engage workers via their own intermediaries. The measure will reduce a deemed employer’s PAYE liability to account for tax that HMRC estimate has already been paid by a worker and their intermediary on the same income, where previously the deemed employer was charged the full liability. Workers will not be asked to pay any more tax, but the tax they have paid will be set against the PAYE liability instead of being repaid to them.

HMRC has undertaken a significant amount of informal consultation with key stakeholders on options to address this issue. HMRC has hosted a series of policy development workshops with members of the Employment Status and Intermediaries Forum and employment tax experts.

HMRC ran a consultation on this measure from 27 April 2023 to 22 June 2023. A summary of responses has been published alongside this document.

Detailed proposal

Operative date

The policy will apply to Income Tax and National Insurance contributions liabilities assessed under PAYE on or after 6 April 2024, which arise as a result of an error in operating the off-payroll working rules in respect of deemed direct payments made from 6 April 2017.

Current law

The current law is included in Chapter 3 of Part 11 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

Proposed revisions

Legislation will be introduced in Autumn Finance Bill 2023 to amend Chapter 3 of Part 11 of ITEPA 2003 to introduce a power that will allow new regulations to be made in the following way:

• in cases where the deemed employer of an individual who worked via their own intermediary would be liable to pay an amount under PAYE regulations in respect of an engagement, and an amount of income tax or corporation tax is estimated to have already been paid or assessed in relation to the engagement, the amount will be treated as having been recovered from the individual or intermediary, and that amount will not be recoverable from the deemed employer
• this amount treated as having been recovered will be the best estimate that can reasonably be made by an officer of HMRC in respect of the income tax or corporation tax already paid or assessed
• provision will be made to prevent a person making a claim for the repayment of, or a claim for relief in respect of, deducting, or setting off the amount treated as having been recovered
• the provisions will be in respect of deemed direct payments made on or after 6 April 2017

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
Nil	Nil	Nil	Nil	Nil	Nil

This measure is not expected to have an Exchequer impact.

There will need to be a forecast adjustment for over-collected tax, this will be reflected in future re-costings of the impacts of the off-payroll working reforms.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

The proposal is expected to impact individuals who have been incorrectly determined as self-employed for the purposes of the off-payroll working rules.  These individuals will no longer have the opportunity to claim a refund for taxes already paid, however no one will be worse off as individuals will still pay less tax than would have been due if their employment status was correctly determined. These individuals will not need to take any action or incur costs. This measure is not expected to impact on family formation, stability or breakdown.

Customer experience is expected to remain broadly the same as this change is not expected to change how affected individuals interact with HMRC.

Equalities impacts

It is not anticipated that there will be impacts on those in groups sharing protected characteristics.

Impact on business including civil society organisations

The proposal is expected to benefit public authorities and businesses who engage workers via their own intermediaries by reducing a deemed employer’s PAYE liability where it is determined, following a compliance check, that the organisation did not apply the off-payroll working rules correctly. 

This measure is expected to have a negligible impact on up to 53,000 businesses. One-off costs could include familiarisation with the changes. Continuing costs could include recording more information on the contractors they engage with. Whilst this information will be required to enable a business to benefit from a set-off, it will not be a legal requirement. There is not expected to be any further continuing costs. 

This proposal is expected to impact civil society organisations. If medium- or large-sized then the organisation would be able to claim a set-off if available. One-off costs could include familiarisation with the changes. They may have continuing costs related to recording information of those they engage, although this is not a legal requirement. There is not expected to be any further continuing costs. 

This proposal is expected overall to improve business’ and civil society organisations experience of dealing with HMRC as they will now be able to claim a set-off against their tax liabilities.

Operational impact (£ million) (HMRC or other)

The operational impacts on HMRC of implementing this measure are in the region of £1.85 million from the tax years 2023 to 2024 to 2028 to 2029.

Other impacts

Other impacts have been considered and none relevant to this measure have been identified.

Monitoring and evaluation

The measure will be kept under review through regular communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the Off-Payroll Working Policy team at: [email protected].