IR35 Off-Payroll Rules Update: New Era Ahead

Background and Purpose of IR35 Reforms

The IR35 tax reforms aim to reduce tax avoidance and increase compliance with off-payroll working rules in the private and third sectors. These changes are designed to ensure that individuals working in a similar manner to employees pay broadly the same tax as employees, regardless of their contractor status.

The Current IR35 Landscape

The IR35 rules, which govern off-payroll working, have undergone significant updates in recent years. The most notable change, introduced in April 2021, shifted the responsibility for determining a contractor’s employment status under IR35 from the contractor’s personal service company to the medium or large business engaging them. This change aligned the private sector rules with those already in place for the public sector since 2017.

New Offset Rules for 2024

In April 2024, new offset rules will come into force to resolve the current double taxation problem. Under the current rules, if HMRC successfully challenges an outside IR35 status determination, the employer has to pay all the Income Tax and National Insurance Contributions (NICs) owed on their earnings. However, tax has already been paid by the contractor’s limited company, leading to a double taxation charge.

The new offset rules will allow HMRC to collect an estimate of the difference between the outside IR35 taxes already paid and the subsequent inside IR35 tax that is due. This will ensure that tax is not paid twice and will distribute tax liabilities more fairly, reducing the exposure to costs for end users who engage with off-payroll labour[1][5].

Impact on Employers and Contractors

The new IR35 changes are relatively minor but will have a significant financial impact in certain situations. Employers can now more confidently engage workers on a personal service company (PSC) basis, knowing that the new offset rules will prevent double taxation. This change is expected to encourage more organisations to engage with off-payroll workers, reversing a trend where some have been turning away from PSC workers due to the previous uncertainty[5].

Compliance Checks and Pauses

As a result of these changes, HMRC has allowed some clients to pause compliance checks in instances where the new offset rules may apply. HMRC will consider a pause if the case meets certain conditions, such as the compliance check having reached a settlement and the taxpayer having acknowledged the error in applying the off-payroll working rules in writing. Although taxpayers can pause the settlement until after the new rules come in, they should still make a payment on account as interest on the tax owing will continue to accrue[5].

Conclusion

The upcoming changes to the IR35 off-payroll rules aim to address the double taxation problem and provide clarity for both employers and contractors. By introducing new offset rules, HMRC seeks to ensure that tax is collected fairly and efficiently, promoting a more stable environment for off-payroll working arrangements. These changes are a welcome development for organisations that work with individuals via intermediary companies, offering a more predictable and equitable approach to tax liabilities.