A long-awaited tweak to the IR35 rules that will put a stop to HMRC over-collecting tax from non-compliant entities is great news for IT contractors, experts claim
There are hopes a that long-awaited legislative tweak to the IR35 off-payroll working rules, due to come into force from 6 April 2024, could breathe new life into the IT contracting market.
The start of the new tax year will herald a change to how the IR35 rules work in both the public and private sectors that will put a stop to contractors having to pay more tax than is due to HM Revenue & Customs (HMRC) in instances where their end-hirers have fallen foul of the off-payroll working rules.
The crux of the matter is that when calculating how much tax is owed by non-IR35-compliant public and private sector organisations, HMRC has previously failed to take into account the income, corporation and dividend tax the contractors working for these entities have already paid.
How did the 2017 and 2021 IR35 reforms change things?
A reform of how the IR35 rules work was embarked on due to concerns the original legislation might be contributing to tax avoidance within contracting circles.
This is because, before the reforms were introduced, contractors were responsible for determining for themselves if they should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35) – based on the work they do and how it is performed.
According to HMRC, this system of self-determination was misused by some contractors to deliberately and artificially minimise the amount of employment taxes and National Insurance Contributions (NICs) they paid by declaring themselves as working outside IR35.
As a result, the reforms introduced a shift in responsibility so that end-hirers were tasked with assessing the employment status of each contractor their organisation engaged and, in turn, deciding if they were working inside or outside IR35.
As extensively documented by Computer Weekly, the shift in responsibility led to a sizeable increase in administrative burden for end-hirers, resulting in many public and private sector organisations banning the hiring of contractors or issuing mandates that all of their contractors be considered inside IR35 for compliance purposes.
However, the soon-to-be enacted legislative tweak means the income, corporation and dividend tax contractors have already paid will be factored in when HMRC calculates the IR35 liabilities of their end-hirers.
“This is a game-changing moment, and one that significantly reduces the perceived risks associated with engaging freelancers and contractors”
Seb Maley, Qdos
According to contractor compliance firm Qdos, this change could make public and private sector entities less wary of hiring contractors and, in turn, open up new job opportunities for them.
“Make no mistake, this is a game-changing moment, and one that significantly reduces the perceived risks associated with engaging freelancers and contractors,” said Qdos CEO Seb Maley. “In simple terms, businesses won’t be overtaxed by tens, potentially hundreds of thousands, of pounds for every contractor they engage under the wrong IR35 status.”
In Maley’s opinion, fixing the double taxation problem means businesses might be more willing to engage contractors on an outside IR35 basis, which is something many business and public sector organisation had shied away from in the wake of the reforms coming into force.
“So while relatively small, this legislative change should give businesses the confidence they need to engage genuine contractors in the most cost-efficient and flexible way,” he said. “It’s not an overstatement to say that it could spark life back into the market, becoming a catalyst for more freelance opportunities.”
Dave Chaplin, CEO of contractor compliance firm IR35 Shield, said resolving the double-taxation issue is “good news for the economy, contractors and hiring firms” because it means “HMRC can no longer wield the threat of a disproportionate tax bill” to encourage firms to put all their contractors onto payroll.
“Because the tax offsets are now automatically baked into the legislation, where firms have made mistakes, settlements will be far quicker and easier to resolve and avoid the need for firms to go to expensive and time-consuming tax tribunals,” he said.
“Firms don’t need a blanket ban approach anymore. If firms show they have taken reasonable care, HMRC will likely be satisfied that the correct tax is being paid.”
