Off payroll working – what is the IR35 offset?

A tweak to the current off payroll working (IR35) rules – known as the ‘IR35 offset’ could come into force from April 2024. This change would put an end to cases of double taxation when HMRC successfully overturns an ‘outside IR35’ determination.

Background to the IR35 offset proposal

Although the expected change will not affect the vast majority of contractors, it does represent a significant correction of the much-maligned rules where both a contractor’s company and his client pay the same tax liability – twice.

Under the current rules, if HMRC challenges an outside IR35 status determination made by a client, the deemed employer must then pay all of the additional NICs and income tax owed as a result of the challenge.

Currently, any taxes already paid by the contractor’s limited company are not taken into account, leading to cases of double taxation.

In cases where HMRC has collected taxes from both the contractor and the deemed employer, it notifies the contractor that they have a right to a refund. However, the current process is burdensome and not included in the current legislation.

This problem has existed since the Off Payroll rules were first rolled out in the public sector in April 2017.

HMRC ran an 8-week consultation earlier in 2023 – concluding on 22nd June.

This followed a longer informal consultation where the HMRC hosted a series of workshops with members of the Employment Status and Intermediaries Forum and employment tax experts.

A formal response to the consultation should be published by the end of 2023.

Many industry experts expect an offset provision to be included in the 2024 Finance Bill… with the change taking effect on 6th April 2024.

How would the tax offset work in practice?

Under the current proposal, the liability for tax and NICs would be shared between the contractor (working via a limited company), and the deemed employed (e.g. the end client).

An estimate for any taxes and NICs paid by the contractor and/or their company would form the basis for the offset sum.

According to the consultation document, the contractors/or their company would not have to pay any additional liabilities as part of the offset.

The following tax and NICs are expected to be 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 expected to be included:

• Employers’ NICS paid by the contractor’s own company. The reason for this is – where an individual is found to be ‘inside’ IR35, their company is not their employer – the client or recruiter is. In such cases, the contractor’s intermediary would need to claim a refund from HMRC.
• Any Class 3 NICs – as they are voluntary payments.
• Taxes and NICs already paid on salary and/or dividends paid to other employees, directors or shareholders of the contractor’s limited company. According to HMRC: “This is because these payments are not related to the services provided by the worker to the client.

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.”

You can read more of Dave’s thoughts on the IR35 offset in our extended FAQ published here.

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