IR35 double taxation removal could be ‘huge moment’

The reported move by HMRC to resolve the double taxation problem associated with the IR35 legislation could mark a “huge moment” for off-payroll workers, according to Seb Maley, CEO at QDOS.    

The contentious legislative issue enables HMRC to accumulate more funds than warranted, as it neglects to credit the tax already settled by a contractor when presenting a tax invoice to a business.  

This has led to numerous instances where businesses find themselves confronted with tax obligations exceeding four times the initially perceived tax underpayment.   

Angela Ferguson, head of employment taxes at PSTAX shared the news on her LinkedIn page. HMRC has indicated their intent to extend the benefits of the upcoming offset changes scheduled for April 2024, she writes, to ongoing off-payroll working (IR35) audits, compliance checks, and disclosures. 

 “The double taxation of IR35 meant that businesses get overtaxed in the event of non-compliance, which meant they were less inclined to engage contractors,” says QDOs’ Maley. “Remove this problem and the perceived risk of engaging contractors is reduced.”  

This sentiment is echoed by Dave Chaplin, CEO of compliance firm IR35 Shield. It is essentially business as usual for contractors and clients, he states.  

“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,” he explains.  “It’s unlikely this would have happened, but without the clarification in statute, the tax tribunals would have needed to resolve the issue.” 

The verdict to change the legislation means eliminating an “oversight” by HMRC and introduces a principle that has been part of the wider employment status regime since 2008, says Tim Walford-Fitzgerald, private client partner at HW Fisher.   

Verdict comes as ‘no surprise’  

Walford-Fitzgerald believes “off-payroll workers” have had a chequered history of alteration and amendment since the IR35 legislation was released almost 25 years ago.  

During September 2022 mini-budget, the UK government’s Growth Plan revealed plans to reverse the 2017 and 2021 changes to the off-payroll working rules (IR35) in an effort to simplify the UK tax system.  

This has since been repealed by the government, a decision that was criticised by many.   

However, in April 2023, HMRC launched a consultation on the IR35 off-payroll working rules, with the prospect of eradicating the double taxation problem. The review, which commenced at the end of July, ran for eight weeks and consulted on the possibility of rectifying the oversight.   

Chaplin says the speed and narrow focus of the single solution in the consultation always read like an announcement; the recent news came as “no surprise” to him.  

“HMRC dragged their heels on this issue for three and a half years and refused to budge on their position at an IR35 Forum meeting in September 2021,” he says.  

“It’s only when a large group of us involved MPs, Ministers, Select Committees and the National Audit Office, that the Treasury finally acknowledged the flaw, announcing in December 2022 that the issue would be resolved.” 

“We should all give ourselves a pat on the back,” he adds.  

Meanwhile, Maley says he delighted that HMRC is finally looking to resolve the problem. “HMRC has known this has been an issue for some time, but for whatever reason, has spent years sitting on its hands. Clearly, the pressure has mounted,” he says.