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IR35 off-set rule
I found the article ‘Correcting the balance’ by Dave Chaplin in Taxation, 7 December 2023 of real interest and it is somewhat surprising given the extensive amount of consultation that occurred prior to the launch of the revised IR35 rules that this particular issue had not been flagged. It is clearly wrong that how the rules had been drafted created the situation to a double charge to income tax.
It is the case that in the position of a person who is wrongly classified to be self-employed that we have a well-rehearsed route to avoid any double taxation. These rules came about following a question raised before the First-tier Tribunal. This case was Demibourne Ltd [2005] (SpC 449). These rules are called the Demibourne principle and are now enshrined in the ITEPA legislation.
The Demibourne principle works well in practice and, following consultation and a working party, there was agreement over how this would work in practice. This allows the engager to have comfort over the tax credit that is being given in respect of income tax paid by the worker (the double taxation element).
In addition, because of the worker being a party to the agreement, consent is generally provided to HMRC to share information which is taken into account. Without this process there would be problems for HMRC given the need for their officers to comply with the Official Secrets Act. It is in practice a tightline that needs to be followed – but it works.
It is, however, my understanding that the proposed change to IR35 may work differently in that while the engager will get credit to avoid a double taxation, they will not be provided with any supporting information over how this is calculated and also no details of who the worker actually is. If I am right in my understanding this proposed procedure will be a nightmare for engagers, particularly if they have a number of workers who HMRC have challenged their status. It begs the question, why is it that the Demibourne principle cannot be followed in these cases?
Therefore, with a proposed go live date of April 2024 and with confirmation that the offset arrangement will be applied retrospectively to April 2017 in respect of compliance cases I would welcome confirmation that the arrangements put into place will work and be easy to operate – as, in my experience, is the situation with Demibourne.
Alastair Kendrick
Independent employment tax consultant,
Email: Alastair@akets.net.
