In the Autumn Statement, the government confirmed that it will legislate to fix the ‘IR35 Offset’ issue – to prevent cases of double taxation when HMRC successfully overturns an employment status decision. We asked an IR35 compliance expert to explain what this means in reality.
Dave Chaplin is CEO of IR35 compliance firm IR35 Shield, a specialist tax advisory on IR35 status matters. Dave was pivotal in helping to bring about the offsets fix, via his campaigning and meetings with government bodies and letters to the select committees. Here he answers our questions on the Offset issue, and how things may change for the market in the future.
What technical issue will the IR35 Offset fix?
The longstanding technical issue with the Off-payroll legislation resulted in situations whereby if HMRC claimed that a firm misclassified a contractor, the tax bill due was equivalent to around 50% on top of the fees paid to the contractor, instead of more like 12.5%. The inequitable situation was caused due to a lack of an automatic legislative offset of taxes paid by the contractor.
The only likely route a firm could have taken to mitigate the unfairness would have been litigating against HMRC via tax tribunal, by seeking to leverage existing statute and common law principles.
With the fix in place, firms will simply be able to settle with HMRC on the engagements where both parties agree the assessment was wrong, avoiding the need for long, and expensive litigation.
The methods proposed will also be based on “best estimates” of taxes paid, rather than actual taxes paid, similar to the techniques used when settlements are reached for large groups of taxpayers.
How much of a disincentive has the IR35 Offset problem been for hirers to take on limited company contractors?
The error may have acted as a disincentive, especially for firms who were advised to adopt extremely risk averse positions. Many firms won’t have been aware of the offsetting routes they could have taken anyway, in which case they may have been unduly worried about taking on contractors.
It’s possible that some firms may revisit previous “blanket ban” policies, but I don’t think the offsets fix will have a dramatic effect on the market. For the first time in 24 years, I actually think we are heading to a position where IR35 might actually work and achieve the objectives set out, whilst not unduly punishing genuine contractors – but firms will need educating.
If firms can access the talent they need, at the price they are prepared to pay, without taking on tax risk, they will continue to do so.
Contractors in high supply and low demand may still find it hard to secure engagements that are “Outside IR35.”
Conversely, for some firms, and high-end niche skills, unless they hire “Outside IR35” for their projects, they won’t find people unless they pay a 25-40% premium on top of market rates.
How long has it taken for the government to take action on this issue?
Too long. They’ve known about the issue since March 2018, and dragged their heels. Ministers intervened after pressure from the market experts, and they were forced to act. The flaw also opened up a massive loophole, to the tune of £250m+ a year, which could only be closed down by implementing the fix. Don’t ask – I’m not saying what it is!
How is it possible (legally) to offset the tax paid by one party (e.g. a contractor) against tax subsequently found to be owed by another entity (e.g. a hirer)
Existing tax laws cater for offsets. Offsetting taxes under IR35 arrangements is nothing new, and every settlement with HMRC since April 2000 will have involved set off.
Similar rules apply when HMRC intervenes where firms have misclassified sole traders. Offsets are nothing new.
All the heavy lifting on the mechanism has already been explored between HMRC and the tax experts that sit on the IR35 Forum.
Is it really such a big issue when HMRC claims it will only cost them £1.85m over 5 years?
In my view, the offsets were needed to prevent protracted litigation by firms to access equitable tax conclusions. Without the offsets, HMRC would inevitably have ended up with some lead cases eventually heading to the Supreme Court after many years, and it seems unlikely the Supreme Court would have supported a perverse position without offsetting.
The cost to firms is nothing, but I would argue there is a saving made by preventing thousands of firms heading to tax tribunals. HMRC may have some extra admin to do, to calculate the offsets, but it will mean a swifter resolution of settlements.
Do you think the resolution of this issue will lead to a bounce back in limited company contractor hires?
Maybe a slight uptick, as we move to a situation where less genuine contractors are not misclassified by firms. But, we won’t see a return to the pre-Off-payroll days. Hindsight tells me that HMRC were right about one thing – about a third of the market probably were deemed employees.
The other factor to bear in mind is that many ex-contractors decided to shut up shop and take permanent jobs, which earned them less money and they paid less tax. Also, firms offshored work overseas, rather than use UK contractors – so hopefully we will see some of that work return.