Offset taxes paid by workers caught by IR35 to protect public purse, says CIOT

Taxes paid by workers who were incorrectly categorised as outside the scope of the off-payroll working rules, also known as IR35, should be offset against the tax due from the organisation that engaged them to protect the public purse, says the Chartered Institute of Taxation (CIOT).

An HMRC consultation¹ is proposing that, in cases where a worker is engaged by an organisation via an intermediary, typically their Personal Service Company (PSC), and mistakenly categorised as self-employed when they should instead have been treated under the off-payroll working rules as an employee of that organisation, any taxes paid by the worker or their PSC should be offset against those now due from the organisation.

The CIOT² has backed this approach, saying it would be fairer and more efficient than the current system which obliges HMRC to notify affected workers of their re-categorisation and requires them or their PSC to recalculate their taxes, amend their tax returns and submit claims for overpayment relief.

Colin Ben-Nathan, Chair of the CIOT’s Employment Taxes Committee, said:

“It is important that employment tax rules are fair to workers, the organisations they are engaged by and to the Exchequer.

“At the moment a worker who is re-categorised as falling inside the off-payroll working rules is likely to end up paying no or little tax on the amount paid to them by the organisation who engaged them, with that organisation effectively bearing that tax as an additional cost. We do not believe that can be the right answer.

“The proposed set-off approach would, in particular, be much fairer on the public purse in cases that involve public bodies, as it would mean that taxes paid by workers who were re-categorised as falling within the off-payroll working rules would be retained by the Exchequer and only the difference would be settled by public bodies, which are of course funded by the government. At the moment, in these cases, the full tax cost is borne by the public bodies and the worker effectively makes a windfall gain at the Exchequer’s expense.”

The consultation proposes introducing this change at the start of the next tax year, on 6 April 2024.

Colin Ben-Nathan added:

“We recommend early confirmation that the new approach will indeed be adopted, and that ongoing compliance cases can be provisionally settled on this basis. This would enable payments on account to be made now rather than having to wait until next April so as to incorporate the set-off and pay only the resultant net liability. Otherwise open compliance cases will likely be stalled pending enactment of the new legislation which would clearly be to the detriment of the Exchequer.”