Big tax changes are on the horizon for IR35, set to take effect on April 6. This new policy, known as ‘IR35 offset’, aims to prevent double taxation by empowering HMRC to offset tax and National Insurance contributions already paid by contractors, fostering fairer sharing of tax liabilities throughout the supply chain.
The offset provision is likely to encourage engagement with freelancers who provide their services through their own limited company (known as a personal service company or PSC), on an outside IR35 basis, providing a positive impact on the contractor market space.
Danny Batey, Senior Tax Consultant at our specialist tax consultancy business, 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, where the contracts and working practices support this, reducing fee-payers' tax and NIC liabilities while attracting top contractor talent.
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“The offset provision, which affects liabilities assessed on a fee-payer going back to 6 th 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. Additionally, assignments outside IR35 enable PSCs to claim T&S, allowing clients to attract contractors nationally, enhancing flexibility and accessibility."
IR35 rules determine if a contractor is genuinely self-employed or a disguised employee for tax purposes. There are two statuses: inside IR35 (employee-like) and outside IR35 (genuine independent contractor). Criteria has been established by case law precedent in order to evaluate a contractor’s IR35 status.
Currently in the private sector, where the end client is a medium/large business, they are responsible for determining the IR35 status for all PSC’s they engage either directly or indirectly. The client must then produce a Status Determination Statement “SDS” and pass this on to all parties in the contractual chain confining their IR35 decision.
Where the client falls within the public sector, regardless of its size, an IR35 assessment must be undertaken for all its PSC’s and an SDS issued. Where a client considers that an assignment is outside IR35, fees paid to the PSC for the work undertaken will be on a gross basis, the PSC is then responsible for paying their own taxes.
However, if HMRC investigates the end-client business and finds that the contractor should have been operating inside IR35, another tax bill is issued for the whole amount of tax and NIC due, resulting in double taxation. Therefore, this leads many end-clients determining contractors as inside IR35, employee-like, or simply not engaging with PSC’s at all, out of fear and risk of significant additional tax and NIC liabilities.
On April 6 this year, a new policy will be introduced which will look to prevent double taxation in cases where HMRC disagrees with an outside IR35 decision. According to the existing regulations, if HMRC contests a client's outside IR35 status determination, the deemed employer is subsequently responsible for settling any additional NICs and income tax owed due to the dispute.
Any taxes already paid by the contractor’s limited company are not considered, which is what leads to double taxation. This new measure gives HMRC the power to offset the amounts of tax and NI contributions already made by the contractor and their intermediary.
When calculating the amount to be offset, there are several types of tax and NICs expected to be included:
Freelancers/contractors utilising an intermediary, like their own limited company (referred to as a personal service company or PSC), who would be considered employees if hired directly. Medium and large-sized clients, partnerships, and individuals hiring individuals who operate through their own intermediary channels.
Public authorities and agencies hiring individuals who operate through their own intermediary channels. Recruitment agencies that sit in the contractual chain and pay PSC’s.
HMRC tax changes coming in April 2024 with four groups affected
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23.02.2024
Big tax changes are on the horizon for IR35, set to take effect on April 6. This new policy, known as ‘IR35 offset’, aims to prevent double taxation by empowering HMRC to offset tax and National Insurance contributions already paid by contractors, fostering fairer sharing of tax liabilities throughout the supply chain.
The offset provision is likely to encourage engagement with freelancers who provide their services through their own limited company (known as a personal service company or PSC), on an outside IR35 basis, providing a positive impact on the contractor market space.
Danny Batey, Senior Tax Consultant at our specialist tax consultancy business, 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, where the contracts and working practices support this, reducing fee-payers' tax and NIC liabilities while attracting top contractor talent.
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