Empowering the Freelance Economy

New government consultation looks into double- taxation of IR35

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The government says it will launch a consultation to explore ways HMRC can account for double-taxation if a business gets caught for non-compliance and contractors have already paid a certain amount of tax.

As it stands, HMRC does not factor in the tax already paid by a contractor during an engagement. That means businesses (which are liable for IR35 under the off-payroll working rules) are overtaxed, should HMRC find non-compliance. 

What is the purpose of the consultation?

The government says it wants “potential” legislative change to address the over-collection of tax in relation to non-compliance with the off-payroll working (OPW) (IR35) rules. It wants to make sure “the option” works effectively and understands better how this would impact different parties in the labour supply chain.

Who could the consultation affect?

This consultation will be of interest to people who work through their own intermediary (for example, a personal service company), medium and large-sized clients, public authorities, agencies, and partnerships.

The double-taxation of IR35 under the off-payroll rules is a massive problem. HMRC doesn’t offset the tax already paid by a contractor when handing a business a tax bill. Put differently, it means HMRC collects much more than it should. It’s morally wrong.

Seb Maley, CEO of Qdos

“It also includes individuals who engage people who work through their own intermediaries, accountants and other agents representing people who work through intermediaries or representing engagers of people working through intermediaries, and HR managers and those who deal with recruitment processes and payroll,” according to the government.

Why could new legislation be a game changer?

“This is potentially game-changing,” says Qdos CEO, Seb Maley. “The double-taxation of IR35 under the off-payroll rules is a massive problem. HMRC doesn’t offset the tax already paid by a contractor when handing a business a tax bill. Put differently, it means HMRC collects much more than it should. It’s morally wrong,” he says.

Maley sees the consultation marking progress. “In theory, it’s an issue which can and should be solved relatively easily too. Even so, I’m amazed that the government has refused to look into this until now. Westminster knew this was a problem some time ago, but has done nothing about it,” he says.

“The double taxation of IR35 gives needlessly risk-averse businesses another reason not to engage contractors – because if they’re found to be non-compliant, HMRC will over-tax them,” he says.

IR35 double-taxation issue could be fixed by 2024

Dave Chaplin, CEO of IR35 compliance firm IR35 Shield welcomed the news:

“Whilst this is labelled a consultation, the speed and narrow focus of the single solution reads like an announcement,” says Chaplin. “The short consultation window of only eight weeks, followed by a response later this year, is a clear signal that the fix will be happening in the next finance bill 2024,” he says.

Conservatives have finally heard the banging drums on this issue and have decided to act.

Dave Chaplin, IR35 Shield

“The double-taxation flaw in the off-payroll rules was grossly unfair on businesses who were being threatened with tax bills more than four times the perceived underpayment of tax,” he says.

Chaplin explains that firms currently under HMRC’s radar can take massive comfort that the plan is for the offset capability to be retrospective, all the way back to April 2017.

“This will mean any bills that have already been issued, and not settled can now be reduced by approximately 75% – to align with the correct amount of tax that should be paid,” he says.

“It appears the Conservatives have finally heard the banging drums on this issue and have decided to act,” says Chaplin.

The consultation will run for 8 weeks, until 22nd June. More information can be found here. 

2 Comments
  1. Peter Vullo says

    Like every other consultation will end up in the long grass. The government just wants tax money it is simple as that they are not interested, just look at their other policies on tax such as not raising the tax thresholds.

  2. S S waran says

    “I used to freelance through my own company, enjoying the freedom and flexibility it offered. However, the introduction of the IR35 system by the government drastically changed the landscape. Suddenly, I found myself unable to continue with my preferred PAYE system. Under IR35, I was compelled to employ an umbrella company to handle my PAYE obligations. Although my agency suggested a few reputable umbrella companies, I soon discovered that some seemingly legitimate ones were engaging in fraudulent practices to lure unsuspecting freelancers into their schemes. This has caused significant problems as the HMRC, the tax authority, is now targeting freelancers to repay taxes owed, while the deceitful umbrella companies have gone into hiding, leaving us in a precarious situation.”

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