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IR35 tax offset – A golden opportunity or time for caution?

Alison Roberts

Alison Roberts | Legal Director

Thursday 23rd May, 2024

On 6th April 2024 the new IR35 double taxation policy was introduced. This is a mechanism by which HMRC, when recovering tax due under PAYE from a deemed employer following non-compliance with the IR35 off-payroll working rules, would be able to account for taxes already paid by the individuals or their intermediaries on that income thus reducing the tax liability. We have yet to see how easy the actual process of obtaining a set off will be – suggestions are that unfortunately it won’t be straightforward or timely!

Some members of the industry are speculating that the tackling of ‘double taxation’ may mean a mass return to the use of personal service companies (PSCs). They feel that if the financial impact of an incorrect determination is significantly reduced then the blanket ‘no contractors’ approach by both public sector bodies and private sector businesses is now seemingly less relevant.

However, if HMRC find that there has been a misapplication of the IR35 rules, they still have the right to apply significant penalties and interest which would be payable by the client (end user). An additional risk is that if the PSC business has not paid, or has defaulted on its taxes, HMRC will have no tax to offset; businesses being wound up due to unpaid taxes is at an all-time high.

Could this policy change also see agencies, clients and contractors themselves adopting a more aggressive approach to their status determinations? If this was the case HMRC would not look favourably on a business that has made an IR35 determination based on a lower tax gap related risk, as opposed to the actual IR35 rules. As a further consideration, would a surge in numbers of PSCs trigger a rise in HMRC’s interest?

The IR35 rules remain unchanged

Prior to any such change of strategy by agencies and clients, perhaps the first thing to consider is that the IR35 rules are unaffected. The status determination must still be made by the client and the onus of taking ‘reasonable care’ in that assessment remains unchanged. Failure to do so can result in penalties and interest as well as the collection of the deemed employment taxes if HMRC overturn the determination as being inside IR35.

Compliant and responsible clients and agencies are unlikely to want to step outside what they know and believe are the correct status determinations, either inside or outside IR35, for commercial advantage. To do so is likely to risk both reputational damage and result in both an immediate and longer-term scrutiny of their trading activities by HMRC with its wide-ranging compliance powers.

Contractors also need to be cautious and realistic about their true employment status to reduce any wider risk of an HMRC challenge to their personal tax returns.

The spotlight isn’t dimming on our sector

HMRC‘s current interest in the recruitment sector is seemingly heightened; from its continued focus on the CEST tool, to tackling tax avoidance in the umbrella industry.  Government’s determination to close the tax gap and necessity for compliance with both the spirit and letter of the tax law points to the need for careful consideration when possibly stepping outside the norm.

Tax avoidance takes many forms and both the current government, and any new one formed by the current opposition, will continue to focus on easy wins and the ongoing clamp down on the promoters of tax avoidance arrangements. Any unusual trends and wholesale movement in the recruitment sector is bound to attract attention.

A change for fairness, not a potential loophole

The IR35 tax offset arrangements are a welcome and sensible move that might just unclog supply chains a little and make it easier for businesses that want to engage independent, flexible workers.

They should be seen as a positive response by government and reflective of the recruitment sector’s efforts in campaigning for changes to the widely unpopular IR35 rules. Hopefully they are an early indicator of the possibility of achieving more radical changes to the existing regime. However, the application of these latest changes by the industry needs to be in line with the spirit of their intention.

As always, if you have any questions or concerns relating to IR35 or the application of the IR35 off-set arrangements, our team is always on hand to help.

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Related article - The long-awaited government consultation is published

Following the Good Work Plan of 2018, which introduced a commitment by the government to regulate umbrella companies, a call for evidence in 2022 gathered the opinions of over 400 contractors, representatives and stakeholders within the umbrella company market. As expected, the evidence gathered supported the rationale for state enforcement.

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