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IR35 reforms: Incoming legislative tweak could reignite contracting market, experts claim

There are hopes a that long-awaited legislative tweak to the IR35 off-payroll working rules, due to come into force from 6 April 2024, could breathe new life into the IT contracting market.

The start of the new tax year will herald a change to how the IR35 rules work in both the public and private sectors that will put a stop to contractors having to pay more tax than is due to HM Revenue & Customs (HMRC) in instances where their end-hirers have fallen foul of the off-payroll working rules.

This “double taxation” situation has led to HMRC having to repeatedly defend itself against claims it over-collects tax in instances where organisations have failed to comply with the IR35 rules.

The problem is known to date back to April 2017 and the roll-out of reforms to how the IR35 rules work in the public sector – and the number of contractors and organisations affected grew once the same changes were rolled out to the private sector several years later in 2021.

The crux of the matter is that when calculating how much tax is owed by non-IR35-compliant public and private sector organisations, HMRC has previously failed to take into account the income, corporation and dividend tax the contractors working for these entities have already paid.

Efforts have made prior to this to make the affected contractors aware that they are eligible to claim back any tax they may have overpaid as a result.

However, the soon-to-be enacted legislative tweak means the income, corporation and dividend tax contractors have already paid will be factored in when HMRC calculates the IR35 liabilities of their end-hirers.

“This is a game-changing moment, and one that significantly reduces the perceived risks associated with engaging freelancers and contractors” Seb Maley, Qdos

According to contractor compliance firm Qdos, this change could make public and private sector entities less wary of hiring contractors and, in turn, open up new job opportunities for them.

“Make no mistake, this is a game-changing moment, and one that significantly reduces the perceived risks associated with engaging freelancers and contractors,” said Qdos CEO Seb Maley. “In simple terms, businesses won’t be overtaxed by tens, potentially hundreds of thousands, of pounds for every contractor they engage under the wrong IR35 status.”

In Maley’s opinion, fixing the double taxation problem means businesses might be more willing to engage contractors on an outside IR35 basis, which is something many business and public sector organisation had shied away from in the wake of the reforms coming into force. 

“So while relatively small, this legislative change should give businesses the confidence they need to engage genuine contractors in the most cost-efficient and flexible way,” he said. “It’s not an overstatement to say that it could spark life back into the market, becoming a catalyst for more freelance opportunities.”

Dave Chaplin, CEO of contractor compliance firm IR35 Shield, said resolving the double-taxation issue is “good news for the economy, contractors and hiring firms” because it means “HMRC can no longer wield the threat of a disproportionate tax bill” to encourage firms to put all their contractors onto payroll.

“Because the tax offsets are now automatically baked into the legislation, where firms have made mistakes, settlements will be far quicker and easier to resolve and avoid the need for firms to go to expensive and time-consuming tax tribunals,” he said.

“Firms don’t need a blanket ban approach anymore. If firms show they have taken reasonable care, HMRC will likely be satisfied that the correct tax is being paid.”

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