Penalty for wrong PSB Outside decision

[supersteamer]

Hypothetical question: what happens if a PSB declares a contract outside of IR35 and then HMRC decide otherwise and the agency has to pay tax and NI.

Does:

1. The amount of tax due by the fee payer get reduced by the amount of tax (PAYE/Corp tax/dividend tax etc.) already paid by the PSC, or
2. The PSC gets refunded the tax it has already paid as it has now been paid by the fee payer, or
3. HMRC keeps the tax already paid by the PSC and adds the tax from the fee payer.

(2) seems fun but unfair as it means an IR35 caught contractor gets away paying zero tax. (3) seems unfair as it means HMRC takes two lots of tax for the same piece of work (double taxation).

So only (1) seems fair, with the fee payer topping up what was due, and the contractor not being out of pocket for a decision they didn’t make - but “IR35” and “fair” in the same sentence?

[TheFaQQer]

My gut feeling is that HMRC would take the double taxation.

The tax that the limited company pays via corporation tax will have gone into one pot, the PAYE and NI from the fee payer into a different one and I doubt that there will be any mechanism for HMRC to reconcile the two payments and correct them.

I don't think that there is anything in the legislation that outlines what would happen in the scenario that you describe, and I would wonder whether anyone considered the reality of implementation when they were drafting the guidance and the law.

For HMRC, at least, it's trebles all round.

[supersteamer]

Just thinking - if the agency has now paid the PAYE and NI then presumably the PSC still gets a credit to allow them to take the net pay as if the agency had done the deductions correctly in the first place.