Off payroll IR35 offset rules proposed changes for 2024

Over recent years off-payroll reforms to IR35 have had many ups and downs. Since a disastrous mini Budget and a U-turn on scrapping IR35 rules, the government has since talked about new offset rules coming into force.

A tax consultation has taken place to look at a solution to double taxation and a result of this consultation, it looks likely that we see off payroll IR35 offset rules proposed changes for 2024 being implemented from 6th April 2024.

In this blog we will look at these proposed offset changes to off payroll working rules and how these may affect contractors and the industry as a whole.

HMRC reportedly working to April 2024 start date for settlement offsets fix

HMRC is reportedly planning to roll out it’s fix for the double-taxation issue affecting IR35 compliance cases by April 2024. This isnt a large change to overall off payroll rules for the majority of contractors, it’s more of a tweak to current rules.

These proposed offset changes have come from consultations held between 27th April 2023 and 22nd June 2023, with the objective to find a solution to the issue of double taxation under IR35 when HMRC successfully overturns an ‘outside IR35’ determination. This followed an informal consultation where HMRC hosted a series of workshops with members of the Employment Status and Intermediaries Forum and employment tax experts.

It is expected that a formal response to the consultation should be published by the end of 2023.

Background to the IR35 offset rules changes

Although this change will not affect the majority of contractors, it does mean a significant change to rules for contractors where both a contractor’s company and his client pay the same tax liability twice.

Under current rules, if HMRC challenges an outside IR35 status determination made, the deemed employer must then pay all the additional NICs and income tax owed as a result of the challenge. Tax already paid by the contractor’s limited company is not currently considered meaning double taxation occurs.

Where tax is collected by HMRC from both the contractor and the deemed employer, it notifies the contractor that they have a right to a refund. However, the current refund process is complex and it’s suspected that not many individuals have pursued this route.

This problem has existed since the off payroll rules were first rolled out in the public sector in April 2017 and private sector in 2021 and changes may well be implemented retrospectively.

How would new offset changes to off payroll working rules work?

The current proposed offset changes mean that the liability for tax and NICs would be shared between both the deemed employer (the client) and the contractor (working via a limited company).

It is expected that the changes will include corporation tax; class 1 (employee only), class 2 and class 4 NICs; and income tax paid on both relevant earnings and dividends. The offset will apply only to income from the off-payroll working engagement.

It is proposed that the changes apply to income tax and NICs assessed on or after 6 April 2024, relating to off payroll working errors since the rules were introduced for large and medium-sized private sector organisations from 6 April 2021 and for the public sector from 6 April 2017.

It is proposed that employer NICs, Class 3 NICs are excluded.

IR35 compliance checks put on pause for some

HMRC has notified clients of the opportunity to pause their compliance check where the proposed changes may apply and if the case meets certain conditions.

HMRC has stated it will consider a pause if the following applies:

• the compliance check has otherwise reached settlement;
• the taxpayer has acknowledged in writing an error in applying the off payroll working rules;
• the gross liability (before offset), including any penalty, has been agreed;
• appropriate information has been provided to assist HMRC with calculating the offset.

Where the conditions are met, HMRC have asked taxpayers if they would like to pause the settlement until after 6 April 2024, when the proposed offset changes are expected to come into effect.

However, it is worth still making an appropriate payment on account as interest will continue to accrue on the liability until then.

How will the IR35 offset issue affect the contracting industry?

The double taxation issue meant that many companies banned the use of contractors. It is hoped that the changes will reduce some of the fear, complexities and challenges that contractors and their deemed employers face and that these changes will once again encourage companies to amend their position on the use of contractors.

Summary

Under the current rules, there’s no offset option meaning that double taxation occurs in some situations, with HMRC collecting outside of IR35 liabilities from the PSC whilst also recovering inside of IR35 taxes from the deemed employer, for the same engagement.

This offset change means that tax liabilities will be shared, resulting in the client (or other deemed employer) no longer carrying a disproportionate tax burden in instances where the determination is overturned.

The proposed changes are set to be introduced in April 2024.

For the majority of clients and contractors, it is essentially business as usual. For some, the changes mean that if they get an IR35 status determination wrong, they won’t be hit with a disproportionate tax bill compared to the actual amount of tax underpaid.

Here at dns accountants, we are experts in contractors and IR35 rules. Our specialist contractors team offer a full range of services for all your contracting needs.

• IR35 advice
• Self-assessment tax returns
• Bookkeeping
• Monthly accounts & reports
• Year-end accounts & corporation tax returns
• Monthly payroll & payslips
• Quarterly VAT returns
• Umbrella services

Contact dns accountants on 03330603304, or you can also e-mail us at enquiry@dnsaccountants.co.uk. for help and advice on contracting and IR35 rules.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.