Will Changes To IR35 Rules in 2024 Make Any Real Difference To Businesses?

Person working out how changes to IR35 will impact them on a calculator surrounded by papers.

Since the introduction of IR35 (off-payroll) working rules in 2021 (2017 for the public sector), enlisting the services of contractors has been increasingly onerous and troublesome for businesses.

Following these changes to IR35 in 2017/21, fee-paying parties (normally end-clients or recruitment agencies) have faced one of the most significant issues that arose with IR35 working rules, namely, liability.

Unsurprisingly, with liability being removed from contractors and placed with end-parties, many businesses have chosen to take a risk-averse approach, which has only been intensified by something known as ‘double taxation’. These issues push businesses to take cautionary steps like blanket Inside IR35 decisions, or they are deterred from working with contractors altogether.

How does double taxation work at the moment?

As it stands today, if HMRC finds a fee-paying party has made an incorrect determination i.e. the contractor was paid outside IR35, but should be on payroll because their actions, responsibilities, and autonomy reflect that of an employee, HMRC determines the income tax it would have collected and it charges the fee-paying party that (including penalties and interest).

When this happens, HMRC does not offset the tax the contractors have already paid. Therefore, HMRC collects more than it was ever owed – leading us to the phrase, ‘double taxation’.

The steps to double taxation

The series of events that could lead to ‘double taxation’ tends to develop as follows:

  • The end-client determines the contractor should be engaged ‘outside IR35’

The contractor completes their contractual obligations and is transferred their fee. Following this, they declare their income and pay their taxes as a PSC.

  • HMRC opens an investigation regarding the end-client

The business will not be subjected to this regularly. However, HMRC will routinely select businesses to investigate as part of their compliance. An area they will analyse is the accuracy of IR35 determinations made by the end-client.

  • HMRC declares that the end-client determination of ‘Outside IR35’ is incorrect

The investigation declares the contractor’s services were comparable to that of an employee. Therefore, they should have been engaged ‘Inside IR35’, so the contractor is subject to the same deductions as an employee. This means they should have paid employment taxes via PAYE, which includes Employer and Employee National Insurance contributions.

  • The fee-payer (the end-client or recruitment agency) will be issued with an ‘overtaxed’ tax bill – double taxation!

Liability sits with the end-client. Therefore, HMRC will issue them with a tax bill that reflects the contractor’s fee being subject to PAYE. However, they won’t offset the tax the contractor has already paid on their fee. Therefore, under PAYE, the fee-payer must stump up for Income Tax, Employee NICs, and Employer NICs (plus, Apprentice Levy, if applicable) being deducted from the fee.

And to top it off, HMRC will charge the fee-payer for interest owed. Bearing in mind that the interest rate is almost 8% and it could be 1-2 years until the incorrect determination is picked up, that could equal a significant amount of money.

How will changes to IR35 rules from April 2024 impact double taxation?

After years of backlash and displeasure among the contracting community about HMRC receiving far more than it is owed, from April 6th 2024, HMRC will be able to offset the tax due or already paid by a contractor and the fee-payer against the calculated liability of being re-determined as ‘Inside IR35’.

Further guidance from HMRC on the practicalities of how offsetting will work is yet to be revealed. We’re still waiting for more understanding on how HMRC will use “assumptions and best judgement” regarding payments already made by the contractor to “arrive at a reasonable figure”.

However, based on previous HMRC statements, KPMG has said they understand deductions will include:

  • Corporation tax
  • Income tax and employee’s NIC
  • Income tax on dividends paid

Unfortunately, these changes to IR35 will not be applied retrospectively. The fee-payers who have already been hit with overtaxed bills by HMRC will have no opportunity to ask for a recalculation to claim back payments made.

Will these changes to IR35 off-payroll working rules make any difference to the contracting community?

The general feeling amongst contractors is that less tax might drive clients (fee-payers) appetite for a little more risk, meaning taking on more contractors. After all, it will cost them less, right?

Yes, but not by much. Income tax being included in the change will give a slight saving, however, when you consider the penalties HMRC can charge (between 0% and 100%) and the interest on that number, clients will still be liable for around 50-90% of the number they previously would have had to pay. The final number will come down to several factors, including how each contractor structures their limited company.

So, the reality is that clients are still in the hot seat. If they make the wrong determination, HMRC could still come knocking. Plus, clients know that when there is one investigation, it’s likely to snowball to their entire contingent workforce, which could trigger regular visits from the dreaded tax man.

In my opinion, this isn’t a fix for the issues that erupted with its introduction in 2021. It’s a positive that HMRC isn’t going to receive more tax than it deserves, but for clients, they want low risk. So many clients are still going to be wary of opening themselves up to potential HMRC investigations, and sadly, many will continue not to use contractor resource as a direct result.

In all the conversations I’ve had with clients about the change to IR35 rules, the value offset does not warrant the risk and spotlight from HMRC.

However, what I would say is I hope it will encourage a small proportion of those vigilant businesses to at least reach out to specialist recruitment agencies like VIQU, that can help them to understand how they can engage contractors compliantly.

 

If you are looking to gain further understanding of these changes to IR35 and if we can expect any more IR35 news in 2024, and would like to explore the possibility of hiring IT contractors this year, please get in touch with our team.

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