Employment tax consultations attempt to address offsetting anomalies
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
17 May 2023
Justine Riccomini explains what the latest major employment tax consultations contain and why you should get involved.
HMRC issued a consultation on Tax Administration and Maintenance Day (TAMD) (27 April 2023) which relates to the Construction Industry Scheme. This follows ongoing discussions between HMRC and the Construction Forum, which is co-chaired by ICAS. The closing date is 20 July 2023.
There are three main themes to this consultation, which ICAS welcomes. These are:
Expanding the statutory compliance test to include VAT compliance
For a subcontractor working in the CIS to be paid gross, they must pass a “gross payment status” test. Part of this test includes proving they have complied with all tax obligations, including PAYE and corporation tax. However, VAT has never been part of the test, and the government is now consulting on whether VAT should be included in that test. Many subcontractors are not VAT registered, but for those that are, HMRC would be expecting them to comply with their reporting and payment obligations over a given period. If a subcontractor fails the Gross Payment Status test, they have to be paid under deduction of either a 20% or 30% withholding relating to the labour element of every payment they receive from a contractor, depending on whether they are officially registered as a subcontractor within the CIS scheme or not. The withholdings can then be offset against income tax liabilities under self-assessment.
HMRC would also use any information gained in relation to VAT compliance for a second purpose of tackling VAT fraud by organised criminal groups.
Landlord/tenant payments – simplifying the requirements
Landlords often make payments to prospective tenants, sometimes to encourage tenants to enter into a lease. There are two types of payment – one is within CIS whilst the other (known as a reverse premium), is not.
- Category A (CAT A) – works that are the responsibility of the landlord or would otherwise have been carried out by the landlord. Such payments are within the CIS.
- Category B (CAT B) – expenditure funded by the landlord for the benefit of the tenant’s business. Such payments qualify as ‘reverse premiums’ and so fall outside the CIS, by virtue of Section 96 Corporation Tax Act 2009.
This complex area is extremely burdensome and often results in the wrong outcomes. The Construction Forum has asked for the Category A payments to be removed from liability to CIS because some landlords operate CIS where it isn’t necessary to err on the side of caution, and in other cases, it can negatively affect the tenant’s cash flow or be a barrier to businesses wishing to occupy commercial premises.
Group reporting requirements – simplifying the need for multiple reports by some groups
Many large groups of companies have to complete multiple “nil” returns to navigate the CIS return process, when this is simply unnecessary and administratively burdensome.
The government is now asking those employers affected to consider ways in which this burden can be removed whilst allowing for the necessary CIS data to be submitted.
Anything else which represents an unnecessary administrative burden
The government has also taken the unusual step of asking people to comment on CIS generally insofar as there are any other admin burdens.
We would encourage all ICAS members involved in CIS matters to contribute to ICAS’ consultation response by contacting jriccomini@icas.com by 1 July 2023.
Off-payroll working consultation
Also issued on TAMD was a consultation on the long-standing anomaly arising when taxes already paid by an individual and/or their intermediary are not taken into account when an individual is deemed to fall within the “off-payroll working” rules at Part 2 Chapter 10 ITEPA 2003. We also co-chair the Employment Status and Intermediaries Forum (Formerly IR35 Forum) and have been heavily involved in addressing this anomaly for a number of years – but progress has been affected by Brexit and Covid, amongst other things.
The power to change regulations
HMRC does not currently have the powers to offset any payments against liabilities, which leads to a double-taxation situation arising which cannot be corrected at present. Therefore, HMRC is seeking to remedy this by introducing legislation which would allow a “Demibourne” style setoff. HMRC explains why Demibourne (which is provided for under SI 2003/2682) cannot apply in the case of off-payroll working below:
“Under Regulations 72E-G of the PAYE Regulations, HMRC may make a direction that the employer is not liable to pay an amount of Income Tax due under PAYE where it appears to HMRC that Income Tax on the payment is likely to have been included on the worker’s Self-Assessment tax return or paid on account or deducted under the Construction Industry Scheme (CIS).
These regulations cannot be readily applied to off-payroll working engagements due to challenges associated with having the worker’s PSC between the deemed employer and the worker. This means it is not possible for HMRC to readily determine whether amounts represent Income Tax paid in respect of the payments received from the off-payroll working engagement.
In addition, the PAYE regulations only apply to Income Tax and do not extend to Corporation Tax and Class 1 NICs that may have been paid by a worker’s PSC.
However, in the less common circumstances where a worker is providing their services through a partnership or another individual, and all of the income is reported through the worker’s Self-Assessment tax return, a set-off may be possible under Regulations 72E-G.”
ICAS welcomes this consultation, which offers those involved in employment status to comment on the potential options for changing this particular aspect, and we encourage members to contribute to the consultation by contacting jriccomini@icas.com no later than 15 June 2023. The closing date for the consultation is 22 June 2023.
Off-payroll working consultation webinar
An on-demand webinar has been recorded by Justine Riccomini in conversation with Phil Staton of HMRC on the topic of off-payroll working policy which explains the consultation and the proposals in detail. Please share this webinar with your in-house teams and clients involved in off-payroll working.
If you wish to contribute to the debate…why not join an ICAS tax committee and bring your expertise straight to the Tax team?
