IR35 Changes: The Off-Payroll Puzzle

In April 2024, significant updates to the IR35 rules, which determine the tax status of contractors, will be rolled out. IR35 has long been a source of concern for small businesses and contractors, with the impending changes aiming to address some of the legislation's challenges and uncertainties.

What is IR35?

Also known as ‘off-payroll’ working rules, IR35 distinguishes between genuine self-employed contractors and ‘disguised employees’ who fulfil the same role as a permanent employee but take a job as a contractor purely for tax purposes. The determination considers various criteria and the overall nature of the working relationship.

In the private sector, medium and large businesses are responsible for determining the IR35 status of contractors they work with. If deemed inside IR35, contractors are treated more like employees for tax purposes. This complication has led to cautious decision-making in some cases, with companies avoiding Personal Service Companies (PSCs) altogether to mitigate the tax risk.

Change is Coming

A significant change, set to be implemented in April, addresses the issue of double taxation when HM Revenue & Customs disputes an outside IR35 decision. If HMRC challenges a determination, the employer is liable for additional National Insurance contributions and income tax.

The new policy empowers HMRC to offset taxes already paid by the contractor's limited company, preventing double taxation. The offset provision covers various taxes, including corporation tax, income tax on dividends and employees' NI contributions.

This change aims to share tax liability more fairly, easing the concerns around engaging with contractors. Clients, recruitment agencies and other employers will no longer bear an unjust tax burden if someone challenges an IR35 determination.

Who Will Be Affected?

• Freelancers and contractors

• Medium and large-sized businesses hiring contractors

• Public bodies hiring contractors

• Recruitment agencies involved in the chain

Danny Batey, Senior Tax Consultant at Markel Tax, said: “The new IR35 policy serves as a strong incentive for recruitment agencies and clients to engage with PSCs fairly and on an outside-IR35 basis, reducing fee-payers' tax and NIC liabilities while attracting top contractor talent.

“The offset provision, which affects liabilities assessed on a fee-payer going back to 6th April 2017 for public sector engagements and 6 April 2021 for those in the private sector, is likely to encourage clients to offer more outside-IR35 roles, benefiting contractors with exciting opportunities and better financial incentives. Agencies supporting this process become preferred partners, leading to successful engagements with both contractors and end clients."

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