Empowering the Freelance Economy

IR35 Offsets double taxation removed, but challenges remain for freelancers

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Freelancers and solo self-employed individuals running their own limited companies in the UK can sigh relief as the IR35 offsets flaw has been officially resolved. The Finance Bill containing the fix received Royal Assent yesterday, meaning the change will take effect from April 6th, 2024. With promising news as this, contractors surely should be celebrating. so why do they still feel a sense of unease when it comes to tax?

What was the problem?

Prior to this fix, a major flaw in the IR35 legislation meant that if HMRC deemed a contractor misclassified as self-employed, the hiring company faced a disproportionately high tax bill. This “double taxation” issue resulted in companies potentially paying four times the actual amount of underpaid tax, creating significant financial anxiety and deterring businesses from hiring contractors.

What has changed?

The new “offsets fix” introduced in Clause 17 of the Finance Bill ensures a fairer and more equitable approach to tax liability in cases of misclassification. This means hiring companies will no longer be hit with excessive penalties, removing a major barrier to engaging with freelance talent.

What does this mean for you?

As a freelancer running your own limited company, this fix provides much-needed certainty and clarity regarding your tax obligations. You can now work with businesses with greater confidence, knowing that any potential IR35 disputes will be handled fairly.

However, it’s important to note that this is just one step towards a smoother IR35 landscape. Dave Chaplin, CEO of IR35 compliance firm IR35 Shield and a vocal advocate for the fix, stresses that further challenges remain. He encourages the government to address these issues to ensure a supportive and efficient tax system for the diverse and entrepreneurial freelance community.

Uncertainty persists for independent workers in the UK

For those goody two shoes out there who start to drive 5 miles per hour under the speed limit when you see a police car in your rearview car window, you probably can relate to the lingering unease of independent workers.

  • There are concerns about inconsistency in how different clients and HMRC itself interpret and apply the IR35 rules, leading to confusion and unfairness.
  • Some believe enforcement is too lenient, allowing disguised employment to persist, while others feel it creates undue burden and risk for legitimate freelance activities.

Impact on income and flexibility:

  • Being classified “inside” IR35 significantly increases tax and National Insurance contributions for contractors, potentially reducing their net income by up to 25%.
  • This can disincentivise freelance work and limit flexibility, as contractors may seek employment offering similar benefits without the tax burden. This can stifle innovation, diverse project experience and skill sets among individuals. The potential for earnings to grow is also limited once someone becomes a permanent worker. This impacts the Treasury’s takings over the long term and not necessarily in a good way.

Lack of clear guidance and support:

  • Freelancers and contractors often feel they lack clear and accessible guidance from HMRC and other bodies on navigating the IR35 complexities.
  • The support available may be inadequate, particularly for smaller businesses and individual contractors.

Concerns about unintended consequences:

  • Some argue that overly cautious interpretations of IR35 stifle genuine freelance activity, hindering the flexible workforce and innovation.
  • The potential for mass reclassification of contractors as employees raises concerns about employment rights and benefits, creating a “grey area” of “zero-rights employees”.

Ongoing debate and potential changes:

  • The legislation and its implementation are constantly debated, with calls for reform or simplification.
  • This ongoing uncertainty creates additional stress and difficulty for contractors in planning and managing their businesses.

Want to learn more?

If you’d like a deeper understanding of the implications of the fix and what it means for your specific situation, Dave Chaplin is hosting a free webinar on February 29th at 12:30 PM. You can register for the webinar here: https://www.ir35shield.co.uk/Webinars

1 Comment
  1. N F says

    The very fact that it is now the end company responsibility to assess IR35 status of a contract is totally wrong! This has to be handed back along with the responsibilities to the contractor. This is the only way to improve things for the UK flexible work force provided by freelance workers and consultants like my self, other than abolishment of the HMRC IR35 all together.

    The very fact that umbrella companies exist, is totally wrong! working through an umbrella company is not being freelance and is not being self employed. You end up with non of the benefits of self employment, or indeed full time employment. I for one, totally refuse to engage through umbrella companies, or engage in any contract other than that deemed outside IR35. Unfortunately this has reduced my UK client base by over 75% owing to many companies blanket assessment of all contract workers. Fortunately however I also have overseas clients to engage with to fill the gap. If I was not so close now to retirement now, I think I would probably be moving my business / residence completely overseas and forget about the UK market all together. This government is totally blind to what the freelance market provides to industry in the UK. If they want to help industry and help grow the economy in this country they have to reverse the ridiculous IR35 amendments introduced in 2021, or better still scrap IR35 completely.

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