News broke this week that HMRC is likely to agree that the offset rules involving IR35 status determinations will be set into law in April 2024. We turn to experts to find out what putting an end to IR35 double taxation means for contractors and the undercurrent of blanket bans
IR35 compliance checks put on pause (for some)
Angela Ferguson, Head of Employment Taxes at PSTAX first shared the news about the IR35 double-taxation development on LinkedIn:
“HMRC are going to let current off-payroll working (IR35) audits/compliance checks/disclosures benefit from the proposed offset changes set to be introduced in April 2024.
“There is currently no mechanism for an engager to benefit from the offset of tax that a worker has paid through their PSC, unlike the offset we have for sole traders, where workers are found to be inside of IR35 and the engager is facing a hefty backdated tax bill.”
Ferguson stated in her post that HMRC will offer clients the opportunity to pause their compliance check if the case meets certain conditions. The employer can then benefit from the proposed offset changes coming in from April 2024. This could apply to errors going back to April 2017.
Ferguson reported in August on a significant development that all Police Forces have recently received letters from HM Revenue & Customs (HMRC), initiating an employment status campaign aimed at examining the classification of their Forensic Medical Examiners (FMEs) and other staff not currently listed on the payroll.
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Blanket bans: Could they start to phase out in 2024?
Many hiring companies have been deemed blanket banning contractors that want to bill as independent contractors through a personal service company/limited company. They have done this to avoid whopping tax bills should at a later date their IR35 status determinations of a contractor be considered incorrect by HMRC.
In a previous report by the Freelanced Informer, Seb Maley, CEO of contractor insurer Qdos, explained, “HMRC does not account for taxes already paid by a contractor when calculating the tax liability owed by a business in the event of non-compliance, under the off-payroll working rules.”
He continued, “This means businesses (which are liable for IR35-related taxes under the off-payroll working rules) are overtaxed, should HMRC find non-compliance.”
The longer IR35 is double taxed, the more risk-averse businesses are likely to be and the more damage done to the flexible workforce. It’s a relatively simple fix too. This is a fundamental flaw in this legislation – one that the government has been aware of for years and amazingly, has done nothing about.Seb Maley, CEO of Qdos
With less financial risk at play come April, we could see signs of blanket bans lifting, but contractors may still have to remain umbrella company workers until hiring companies get used to the idea. Hiring companies may also want to be off the hook for the risk of umbrella company tax avoidance, so could see the offset rules as a blessing if they can avoid using umbrella companies as payment intermediaries and create roles outside IR35.
Dave Chaplin, CEO of IR35 compliance firm IR35 Shield says the removal of this ‘double-taxation’ flaw means that where firms get the determination wrong, the extra tax payable will, as a rule of thumb, be roughly equal to the employer’s NI bill that would have been paid, had the contractor been on-payroll, instead of a bill four times that.
“The flaw was one reason many firms may have blanket banned the use of contractors, and this fix may encourage those firms to rethink their position,” says Chaplin.
Business as usual?
However Chaplin says for clients and contractors, it is essentially “business as usual.”
He explains, “The changes mean that if they get an IR35 status determination wrong, they won’t be hit with a disproportionate tax bill compared to the actual amount of tax underpaid. It’s unlikely this would have happened, but without the clarification in statute, the tax tribunals would have needed to resolve the issue.
“This is a sensible and practical measure, to prevent firms and HMRC entering into unnecessary and costly litigation.
Chaplin says “HMRC dragged their heels” on this issue for three and a half years and “refused to budge” on their position at an IR35 Forum meeting in September 2021.
“It’s only when a large group of us involved MPs, Ministers, Select Committees and the National Audit Office, that the Treasury finally acknowledged the flaw, announcing in December 2022 that the issue would be resolved. We should all give ourselves a pat on the back,” says Chaplin.