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(Draft) ESM10038 guidance: Off-payroll working – setting off Tax and National Insurance contributions already paid: The set-off process

Published 25 January 2024

Information to be provided by client or deemed employer

HM Revenue and Customs (HMRC) can only consider a set-off where it is able to identify the worker and intermediary. This means that a client or deemed employer will need to provide certain information relating to workers and intermediaries to enable HMRC to carry out checks to ensure that tax returns have been submitted, and tax and National Insurance contributions (NICs) have been paid or assessed for the relevant periods.

As a minimum, HMRC will need the following information:

• the worker’s full name or National Insurance Number (NINO)
• the intermediary’s or partnership’s name
• the intermediary’s Company Reference Number (CRN) or VAT Registration Number (VRN), where applicable
• the partnership’s reference number, where applicable

If a client or deemed employer does not provide this information, or HMRC is unable to identify the worker and intermediary, a set-off will not be given. This is because HMRC will not be able to confirm that relevant returns have been submitted and that tax and NICs has been paid or assessed.

Where HMRC can identify the worker or intermediary, and confirm returns have been submitted, the next step is to identify whether relevant tax and NICs has been paid in order to direct a set-off.

HMRC must be able to satisfy itself that an amount of Income Tax, NICs, and corporation tax:

• has been paid
• assessed

By either the worker, an intermediary, or both on income received for services provided under an engagement to which Chapter 10, Part 2 ITEPA 2003 applies.

If HMRC cannot identify an amount of tax or NICs which has been paid or assessed by a worker or an intermediary, a set-off will not be given in respect of that worker or intermediary.

Where the conditions at regulation 72GA(1) Income Tax (PAYE) Regulations 2003 and Regulation 51 Social Security (Contributions) Regulations 2001 have been met, HMRC will consider making a direction to set-off an amount of Income Tax, NICs and corporation tax, against a deemed employer’s liability from a deemed direct payment.

Identifying a set-off amount

The next stage in the process is to identify the amount of the set-off. It is important to note that not all taxes and NICs can be included in the calculation of the set-off amount. The taxes and NICs which are available to set-off against the relevant debt, as well as those which are not, are listed below.

The taxes and NICs which will, where applicable, be used to calculate a set-off are:

• Income Tax on remuneration received by the worker
• Income Tax paid on a share of partnership profits
• Income Tax paid on dividends
• Corporation Tax
• Primary Class 1 NICs (employee)
• Class 2 NICs
• Class 4 NICs

Taxes and NICs which are not included in a set-off are:

• Secondary Class 1 NICs (employer)
• VAT
• Income tax on remuneration not from the relevant engagement

HMRC will only consider making a direction where it appears that amounts of Corporation Tax, Income Tax or NICs have been paid or assessed by a worker or an intermediary on income from an engagement to which Chapter 10, Part 2 ITEPA 2003 now applies. If HMRC cannot identify, or be able to estimate, an amount of tax and NICs paid by a worker or an intermediary, no set-off will be given.

Method of calculation

Where HMRC can establish the tax and NICs which has been paid or assessed by a worker or an intermediary, a calculation based on actual figures will be provided. It should be noted that only tax and NICs paid or assessed in the relevant periods will be considered for a set-off in any tax year.

In situations where HMRC can establish that some tax and NICs has been paid or assessed, but cannot identify an accurate figure from a relevant engagement, HMRC will make the best estimate of the amount to set-off which it reasonably can based on the information available.

To calculate an estimated set-off amount HMRC will use information included in the relevant tax returns of those workers and their intermediaries who are part of the compliance review. Therefore, the estimated amount will be dependent on the circumstances of the workers and their intermediaries, and will be different for each person. HMRC will not apply a flat-rate set-off to all PAYE liabilities.

HMRC will use the set-off figure to reduce the PAYE liability of the deemed employer and produce a revised calculation.

If HMRC cannot reasonably establish that any tax or NICs has been paid or assessed on the relevant OPW income a set-off will not be calculated as it will not have met all of the conditions for HMRC to consider allowing a set-off.

Action following calculation of set-off

Following the calculation of the set-off, HMRC will issue a direction to the deemed employer, the intermediary, and any relevant workers.

Where HMRC determines that a direction is appropriate, a revised calculation taking account of the set-off will be issued to the deemed employer. Where a set-off amount includes figures for more than one worker, the deemed employer will be provided with an overall set-off amount rather than a breakdown of set-off amounts per worker.

HMRC will issue directions to all workers and intermediaries included in the set-off informing them of the amount of set-off relevant to them, which will include details of the relevant period and which engagement it relates to. If HMRC does not hold a current address and has not been supplied with one, a set-off may still be allowed, but HMRC will not send details of this to the worker or intermediary.

Where HMRC issues a direction regarding an amount of set-off, the worker and intermediary will not be able to claim any repayment of the tax paid or assessed on income from the relevant engagement or set this against other tax due.