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IR35 Update 2024: What It Means for Contractors and Businesses

By April 15, 2024No Comments

Introduced back in April 2021, the off-payroll working rules (IR35) have been a source of confusion and consternation for businesses wishing to engage the services of a contractor.

The intention of the legislation was to ensure a contractor pays broadly the same income tax and National Insurance as an employed worker would, and apply to:

  • contractors providing services to a client through their own intermediary
  • the client receiving those services
  • an agency or supplier providing workers’ services to a client

In most cases, the party responsible for determining whether the contractor is ‘inside’ or ‘outside’ of IR35 is the client receiving the services (the exception to this is when the contractor is working with a small business), and this potential liability is considered one of the big challenges for businesses wanting to work with contractors.

The ‘double taxation’ problem

However, as well as the financial risk of miscategorising a contractor, there is also the ‘double taxation’ problem, and this has become a further disincentive from working with contractors.

Double taxation occurs when HMRC considers a contractor to have been incorrectly placed outside of IR35 by the client. As a result, HMRC issues a tax bill for the PAYE and National Insurance liability—and any tax already paid by the contractor is not offset, hence the term ‘double taxation’.

Ultimately, HMRC collects too much tax from the client.

How the IR35 update is fixing this problem

Following a two month consultation on the issue of double taxation, HMRC has rolled out some key changes to IR35, effective from 6th April 2024.

Moving forward, HMRC will use a combination of ‘assumptions and best judgement’ to estimate the tax already paid by the contractor. Potential deductions from the client’s tax liability will include:

  • Corporation tax paid by the contractor’s intermediary
  • Income tax and NICs paid to the contractor via the intermediary
  • Class 2 and Class 4 NICs
  • Tax on dividends

Unfortunately, these rule changes will not be applied retrospectively, which means businesses won’t be able to claim relief on any double taxation they’ve already paid. What’s more, these offsets won’t cover Employer NICs or the Apprenticeship Levy, which means businesses will still be liable for those costs.

Some IR35 compliance checks will be paused

Following the introduction of these changes, HMRC is allowing some end-client businesses to pause compliance checks in circumstances where the new rules might apply and the case meets certain conditions, including:

  • The compliance check has been settled
  • The taxpayer has provided written acknowledgement of an error in applying off-payroll working rules
  • The tax liability and penalty have already been agreed upon
  • Information has been provided to HMRC by the taxpayer to help calculate the offset

These rule changes should be welcomed by businesses, but IR35 is still complex legislation that catches a lot of organisations out. The best way to ensure you’re compliant is to employ the services of experienced chartered accountants, such as the team here at Warr & Co. We offer a full range of business accounting services to startups, small businesses and businesses across a range of industries. We also offer accounting services to freelance contractors, whether you’re a sole trader or limited company.

To find out more about how we can help your business stay on top of IR35, as well as a variety of other accounting requirements, book a free consultation today.

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