Contractors can reclaim double tax
Article on AccountingWeb: https://www.accountingweb.co.uk/tax/...aim-double-tax
Where both the contractor’s personal service company (PSC) and the engager have paid tax on the value of the same contract, the PSC and/or contractor should be able to reclaim any duplicated taxes.
This is the firm view of Robert Salter, a client service director at Blick Rothenberg, commenting on the National Audit Office’s (NAO) report: Investigation into the implementation of IR35 tax reforms.
The NAO report looks at the reformed IR35 rules which were implemented in the public sector from 6 April 2017, when those rules were renamed by HMRC as ‘Off-payroll working’.
A similar reformed version of IR35 applies to contracts where the engager is a large or medium sized company in the private sector from 6 April 2021, with the implementation postponed from April 2020 due to the Covid-19 pandemic.
Who pays the tax?
The off-payroll working rules reverse the responsibility for assessing and paying the tax on a contractor’s income, from the PSC to the engager and any employment agency (or umbrella company) in the chain. The engager rather than the worker assesses whether the worker is within IR35 (ie is a deemed employee) or not.
If the worker is a deemed employee, the paying agency must deduct tax, employer’s and employee’s class 1 NIC, and any apprenticeship levy, under PAYE in respect of the amount invoiced for the worker’s services (the deemed earnings). The agency will issue a statement to the PSC (normally a payslip) indicating how the fees have been subjected to tax and NICs.
The PSC treats the net deemed earnings as taxed employment income of the worker, and that income is shown as deemed employment income on the employment pages of the worker’s personal self assessment tax return. The PSC is essentially transparent in relation to income that has been subject to the off-payroll treatment.
The net deemed earnings are excluded from being subject to corporation tax in the PSC by the legislation.
If the worker’s contract is not caught by the off-payroll rules, the engager (or agency) will pay the full value of the invoice for the worker’s services to the PSC, which will then pay corporation tax on that income. Any income the worker extracts from his PSC will be taxed as a dividend or salary as appropriate.
Public sector problems
At least three government departments (The Home Office, DWP and HM Courts & Tribunals Service) have been penalised by HMRC for not applying the off-payroll rules correctly. The 2020/21 accounts for those departments show that HMRC assessed tax, penalties and interest for errors in assessing the tax liabilities for its off-payroll workers over the financial years 2017/18 to 2020/21.
In those cases, the contractors’ PSCs will have paid corporation tax on the gross income received in respect of their invoices submitted to those departments. However, the government departments are now required to pay over PAYE and NIC on the same income, in other words the value of the contract has been doubly taxed.
Cake and eat it
The NAO has confirmed where a deemed employer, eg a government department, has settled the taxes due in respect of a contractor’s work as part of a PAYE audit settlement, the contractor and their PSC are entitled to reclaim any taxes which it has settled on the same income. This corporation tax (for the PSC) or income tax (for the contractor) will have been paid alongside the submission of the relevant tax return.
Will HMRC repay tax?
Salter said, “Traditionally, HMRC has tried to block any tax refund claims by contractors in this type of ‘double taxation’ situation.
However, HMRC does have an obligation under its Charter to help taxpayers pay the right amount of tax. It states, ‘We’ll work within the law to make sure everyone pays the right amount of tax and gets their benefits and other entitlements.”
Salter added: “Sadly, however, the reality is that HMRC does nothing to help ensure that only the correct amount of tax is collected, and that refunds are issued to the contractors and PSCs in this situation. Indeed, the reality is even worse with HMRC typically doing everything possible to block tax refunds to contractors by saying, that refunds aren't due.”
What should contractors do?
Contractors should contact their public sector engager and ask whether their contract has been included in a PAYE settlement for that engager.
Where the contract was included in the PAYE settlement, the PSC should demand a statement of the tax paid by the engager on the PSC’s income, and also request confirmation of the reference number under which the relevant tax settlement was made. This statement can be used to revise the PSC’s accounts, and to amend its corporation tax returns.
The contractor may also need to amend their personal tax returns to include income from the contract as employment income, though any income tax due on such deemed employment earnings should be ‘matched’ against the taxes paid by the government department as part of the disclosure and so would be fundamentally an administrative obligation.
Where both the contractor’s personal service company (PSC) and the engager have paid tax on the value of the same contract, the PSC and/or contractor should be able to reclaim any duplicated taxes.
This is the firm view of Robert Salter, a client service director at Blick Rothenberg, commenting on the National Audit Office’s (NAO) report: Investigation into the implementation of IR35 tax reforms.
The NAO report looks at the reformed IR35 rules which were implemented in the public sector from 6 April 2017, when those rules were renamed by HMRC as ‘Off-payroll working’.
A similar reformed version of IR35 applies to contracts where the engager is a large or medium sized company in the private sector from 6 April 2021, with the implementation postponed from April 2020 due to the Covid-19 pandemic.
Who pays the tax?
The off-payroll working rules reverse the responsibility for assessing and paying the tax on a contractor’s income, from the PSC to the engager and any employment agency (or umbrella company) in the chain. The engager rather than the worker assesses whether the worker is within IR35 (ie is a deemed employee) or not.
If the worker is a deemed employee, the paying agency must deduct tax, employer’s and employee’s class 1 NIC, and any apprenticeship levy, under PAYE in respect of the amount invoiced for the worker’s services (the deemed earnings). The agency will issue a statement to the PSC (normally a payslip) indicating how the fees have been subjected to tax and NICs.
The PSC treats the net deemed earnings as taxed employment income of the worker, and that income is shown as deemed employment income on the employment pages of the worker’s personal self assessment tax return. The PSC is essentially transparent in relation to income that has been subject to the off-payroll treatment.
The net deemed earnings are excluded from being subject to corporation tax in the PSC by the legislation.
If the worker’s contract is not caught by the off-payroll rules, the engager (or agency) will pay the full value of the invoice for the worker’s services to the PSC, which will then pay corporation tax on that income. Any income the worker extracts from his PSC will be taxed as a dividend or salary as appropriate.
Public sector problems
At least three government departments (The Home Office, DWP and HM Courts & Tribunals Service) have been penalised by HMRC for not applying the off-payroll rules correctly. The 2020/21 accounts for those departments show that HMRC assessed tax, penalties and interest for errors in assessing the tax liabilities for its off-payroll workers over the financial years 2017/18 to 2020/21.
In those cases, the contractors’ PSCs will have paid corporation tax on the gross income received in respect of their invoices submitted to those departments. However, the government departments are now required to pay over PAYE and NIC on the same income, in other words the value of the contract has been doubly taxed.
Cake and eat it
The NAO has confirmed where a deemed employer, eg a government department, has settled the taxes due in respect of a contractor’s work as part of a PAYE audit settlement, the contractor and their PSC are entitled to reclaim any taxes which it has settled on the same income. This corporation tax (for the PSC) or income tax (for the contractor) will have been paid alongside the submission of the relevant tax return.
Will HMRC repay tax?
Salter said, “Traditionally, HMRC has tried to block any tax refund claims by contractors in this type of ‘double taxation’ situation.
However, HMRC does have an obligation under its Charter to help taxpayers pay the right amount of tax. It states, ‘We’ll work within the law to make sure everyone pays the right amount of tax and gets their benefits and other entitlements.”
Salter added: “Sadly, however, the reality is that HMRC does nothing to help ensure that only the correct amount of tax is collected, and that refunds are issued to the contractors and PSCs in this situation. Indeed, the reality is even worse with HMRC typically doing everything possible to block tax refunds to contractors by saying, that refunds aren't due.”
What should contractors do?
Contractors should contact their public sector engager and ask whether their contract has been included in a PAYE settlement for that engager.
Where the contract was included in the PAYE settlement, the PSC should demand a statement of the tax paid by the engager on the PSC’s income, and also request confirmation of the reference number under which the relevant tax settlement was made. This statement can be used to revise the PSC’s accounts, and to amend its corporation tax returns.
The contractor may also need to amend their personal tax returns to include income from the contract as employment income, though any income tax due on such deemed employment earnings should be ‘matched’ against the taxes paid by the government department as part of the disclosure and so would be fundamentally an administrative obligation.
. Anyway, I agree that it's of interest.
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