HMRC should be pro-actively advising Personal Service Companies (PSCs) and freelancers that they are entitled to reclaim taxes which they have incorrectly paid.
Confusing IR35 rules over when a freelancer is actually a freelancer for tax purposes, and what PSCs and their end clients, e.g., government departments, should pay in tax, means that in many cases, HMRC have collected taxes twice on the same income. Once from the deemed employer after PAYE (IR35) tax reviews and from the freelance contractor or their PSCs.
HMRC have a legal and moral responsibility to sort out what for many has been a ‘double collection of tax’ purely on the one source of income.
Traditionally, HMRC have tried to ‘block’ any tax refund claims by contractors in this type of ‘double taxation’ situation. However, The National Audit Office (NAO) recently published a review into the IR35 – the rules governing whether someone is a ‘deemed employee’ for tax purposes or not. They have confirmed where a deemed employer e.g., a government department, or a freelancer has settled the taxes due e.g., PAYE, in respect of a freelancer’s work as part of a PAYE audit settlement, the contractor, or their PSCs, are entitled to reclaim any taxes which they had personally settled – for example, via the submission of an annual tax return.
The confirmation from the NAO that taxes are due back to freelancers in this situation is welcome otherwise HMRC would be collecting twice as much tax as they would have received something which cannot innately be equitable or legitimate.
HMRC’s obligations are backed up by the Taxpayer Charter which states:
‘Give the taxpayer accurate, consistent and clear information, which helps the taxpayer understand their rights and what they can claim. Make sure everyone pays the right amount of tax and gets their benefits and other entitlements.’
Sadly, however, the reality is that HMRC do nothing to help ensure that only the correct amount of tax is collected, and that refunds are issued to the freelancers 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.
Refunds may not be due to every freelance contractor who has worked with Government Departments since April 2017 – some of them may legitimately have been treated as ‘self-employed’ under the IR35 legislation and therefore been personally responsible for settling their own taxes e.g., via a tax return. However, if HMRC and the Government is genuinely focussed on ensuring that only the correct taxes are paid and meeting the requirements laid down by the Taxpayer Charter, they need to address this area as a priority and advise taxpayers of their potential tax reclaims as a matter of priority.
Would you like to know more?
If you would like to discuss the above or how it may affect you, please get in touch with your usual Blick Rothenberg contact or Robert Salter using the details on this page.
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