Off-payroll working – what is the IR35 offset?

A change to the off-payroll working (IR35) rules – known as the ‘IR35 offset’ – was introduced following HMRC consultation, addressing long-standing concerns around double taxation when an ‘outside IR35’ determination is overturned.

For a broader explanation of how the rules operate, see our IR35 overview and guide to Status Determination Statements.

Background to the IR35 offset

Although the change will not affect the vast majority of contractors, it represents a significant correction to the much-maligned rules under which the deemed employer could previously be liable for the full PAYE bill without accounting for tax already paid by the contractor.

Under the earlier rules, if HMRC challenged a client’s outside IR35 status determination, the deemed employer had to pay all additional NICs and income tax owed as a result of the challenge.

Previously, taxes already paid by the contractor’s limited company were not taken into account when calculating this liability, resulting in double taxation.

In cases where HMRC collected tax from both the contractor and the deemed employer, the contractor could seek a refund, but the process was often complex and time-consuming.

This issue has existed since the off-payroll rules were first rolled out in the public sector in April 2017.

HMRC consulted on the issue during 2023, before confirming changes to the PAYE calculation process in subsequent legislation.

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How does the tax offset work in practice?

Under the updated rules, HMRC can take into account tax and NICs already paid by the contractor and/or their company when calculating the deemed employer’s liability.

According to the consultation framework, the contractor and/or their company should not be required to pay additional liabilities for amounts that have already been appropriately taxed.

The following taxes and NICs are included when calculating the amount to be offset:

• Corporation Tax paid by the contractor’s company on income from the assignment in question.
• Income Tax and Employees’ NICs on a salary paid from the contractor’s company, on income generated by the assignment in question.
• In the case of a self-employed individual, any Class 2 and Class 4 NICs paid on income from the assignment.
• Any tax paid by an individual on company dividends generated by income from the assignment.

The following types of NICs are not included:

• Employers’ NICs paid by the contractor’s own company. Where an individual is found to be inside IR35, the intermediary is not considered the employer for these purposes, and a separate reclaim process may apply.
• Any Class 3 NICs, as they are voluntary payments.
• Taxes and NICs paid on income relating to other employees, directors or shareholders not connected to the relevant assignment.

In practice, this means HMRC focuses on collecting the correct overall tax, rather than charging the same income twice.

How will the IR35 offset issue affect the industry?

We asked Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, for his thoughts:

The offset changes are merely a formalisation of routes the taxpayer could take under the Demiborne principles, to avoid unfair double taxation.

The legislation means HMRC and the taxpayer will have a smoother route to ensure the collection of the perceived loss of tax, and no more. Each party will pay a correct and fair amount of tax.

I don’t see this making much difference to market dynamics, because, in reality, the offsets are effectively already there. It will mean less unnecessary and expensive tussles at tax tribunals to resolve the issue.

Where clients have taken reasonable care and conducted robust assessments in line with the statute, and then followed up with some ongoing monitoring of status and evidence gathering, they have no reason to be fearful.

For more on how clients are expected to assess IR35 status, see our guide to reasonable care.