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Dear all,
We’re writing to update you on HMRC’s approach to dealing with the potential over-collection of tax in off-payroll working compliance cases, in particular:
1. A communication from HMRC about information requirements in respect of workers and their Personal Service Companies (PSC) that are included in compliance settlements; and
2. Details of the HMRC consultation on potential legislative changes to allow HMRC to account for taxes already paid by a worker and/or their intermediary when calculating the liability due from end-clients (or agencies if they are the deemed employer) where an error has been made in applying the off-payoll working rules.
The over-collection of tax can occur where a public sector body has incorrectly determined a worker as falling outside the off-payroll working rules. The public sector body can become liable for the full amount of Income Tax and National Insurance contributions (NICs) that should have been deducted at source had the correct determination been made. However, the worker and their PSC may have already paid Corporation Tax, Income Tax and NICs on payments received from their engagement.
The existing legislation does not allow HMRC to set off taxes already paid by the worker against the public bodies' liability following a compliance check. Therefore, where the public sector body pays the full tax liability on an engagement, as part of the settlement with HMRC, the worker and their PSC may be due a repayment for taxes they have already paid.
HMRC has introduced a process to notify workers and their PSCs of their potential entitlement to overpayment relief, which addresses this issue within the existing legislation. However, their compliance activity to date suggests that the information to identify a worker and their PSC is not always held by the client, which has made it difficult to identify and write out to affected contractors for closed cases to date.
Note: keeping appropriate records to identify a worker and their PSC will also be a key requirement for the availability of any potential future legislative set-off.
HMRC have prepared a factsheet that describes the issue and record keeping requirements for public sector clients. They have also updated their guidance on 'Off-payroll working for clients'.
In parallel, HMRC announced on 27 April a consultation on a possible legislative change to allow them to set off taxes paid by the worker and their PSC on the same income, against the deemed employer’s liability. If a legislative change is agreed, this would replace the process to notify workers for open and future compliance checks. This policy will not apply to cases that are settled before the change is introduced. For these cases, HMRC will continue to notify the worker and their PSC of their potential entitlement to claim a repayment of taxes, where overpaid, and where it has the information available to do so.
The Tax Centre of Excellence and HMRC will be delivering a joint technical call on 23 May to provide further information on the proposed legislation and the implications for public sector bodies. There will be an opportunity for you to ask questions during the session or alternatively you can submit questions in advance to tax.coe@justice.gov.uk. Invitations to this event will follow soon.
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