In 2023, HMRC announced their intention to reform IR35 legislation effective as of April 2024. The reform makes alterations to IR35 rules, bringing an end to the pervading issue of ‘double taxation’ and, by extension, offering a positive boost for contractors, and those companies looking to engage them.
In this blog, we take a look at what exactly those changes are. But first, a little history…
What is IR35?
Sometimes referred to as the “off-payroll working rules”, IR35 is a tax legislation, aimed at combatting tax avoidance. It focuses on ensuring that individuals or contractors, who provide a service to an organisation on either a self-employed basis, or via a limited company, are paying the correct amount of tax and not using their status as a contractor to avoid paying the same contributions to HMRC as they would if they were a direct employee.
In short, for contractors, being:
· Inside IR35 means that the employer deducts tax from pay in the same way it would for an employee
· Outside IR35 means that the contractor is responsible for their own taxes
Prior to 2017, it was the contractors’ responsibility to ensure that they correctly assessed themselves as either inside or outside of IR35. However, in more recent years, the government has been assessing how successful IR35 has been and testing adherence to the legislation. What their assessments found is that as many as 90% of contractors who should fall within IR35 regulations, were classing themselves as being exempt, potentially costing the Treasury billions of pounds a year in lost revenue.
Therefore in 2017, changes were made to the legislation which meant that all public sector organisations would be responsible for assessing the correct employment status of contractors that they engaged, rather than the onus being on the contractors themselves. As of April 2021, the private sector also follows suit. If an organisation has over 60 employees, and also engages contractors, they are responsible for determining the IR35 status of those contractors.
What do I need to know about the April 2024 changes to IR35 legislation?
The principal change in the new IR35 legislation essentially means that HMRC has implemented measures to eliminate ‘double taxation’ – an issue that has plagued UK businesses since the responsibility of IR35 determination was placed upon them in 2017.
For some background – When a company hires a contractor, they determine the contractor’s IR35 status. This might then be investigated by HMRC to corroborate the company’s decision. If HMRC found that the contractor’s status had been incorrectly determined by the company as outside IR35, then their fee should have been subject to PAYE deductions and National Insurance contributions from both the contractor and company – the latter of which would then receive a tax bill for the unpaid amount.
However, when HMRC attempted to recover payments linked to an incorrect IR35 determination, the tax bill issued did not take into account the taxes already paid by the contractor. Subsequently, the business would be issued a disproportionate tax bill and ultimately pay more tax than was owed. The issue has contributed to a culture of trepidation (and in some cases an outright ban) when approaching contractors who might be outside of IR35, so as to avoid the potential financial risk.
As of April 6th 2024, the IR35 legislation reform offsets this issue. Moving forward, HRMC will automatically account for taxes already paid by the contractor – effectively putting an end to ‘double taxation’.
What does this mean for contractors?
As the reform means there is no further potential to be issued an excessive tax bill for an incorrect IR35 assessment, for most companies the tendency towards risk aversion when engaging contractors is likely to be minimised. In turn, this could potentially mean more opportunities for contractors outside of IR35 for the rest of 2024 and beyond!
If you have any questions around IR35, feel free to get in touch with one of the team who will support you > info@neuven-consult.com