Autumn Statement: The IR35 Offset Mechanism
As a contractor, navigating the world of taxes and regulations can be overwhelming. With the changes in IR35 legislation over the past few years it has been more challenging for off payroll workers operating through personal service companies (PSCs) to find contracts, due to companies wanting to reduce their use of contractors.
In the latest Autumn Statement on the 22nd of November 2023, Chancellor Jeremy Hunt confirmed proposed changes that from 6th April 2024 there will be a new mechanism to offset tax already paid in the case of misclassification. Our blog outlines what exactly this entails and the impact that this change will have on off payroll working.
Understanding the IR35 Offset Rules
Effective tax planning and compliance with IR35 is essential for contractors to minimise their tax burden. This latest change allows for the offsetting of changes in income tax, national insurance, and corporation tax liabilities in the event of HM Revenue and Customs (HMRC) disagreeing with a contractor’s status determination.
Under the current legislation if HMRC decide that the end user has incorrectly determined that the contractor is operating outside of IR35 then arrears of PAYE, as well as employee and employer NICs are due on the payments made to the contractor, in accordance with payroll rules. This burden rests on either the end client or the contractor, dependent on who determined the status. The law was changed in April 2021 so that large companies will bear the risk of paying any tax liabilities for any contractor they take on who HMRC later deem inside IR35. However, if a contractor is working for a small company, it is their responsibility to ensure they are not an employee.
The offset mechanism is a change to this law in that should HMRC decide that the original status determination was incorrect and the contract falls inside the scope of IR35 then the taxes due can be offset against those already paid by the contractor’s limited company. Meaning that the corporation tax, income tax and NICs already paid by the contractor will be subtracted from the total arrears due from the end client and contractor.
Changes Coming into Effect from 6th April 2024
From the start of the new tax year in April 2024, the new offset mechanism will come into place for all contracts in both the public and private sectors. Not only will these rules apply to any contracts going forward from here but also will be available for arrears going back to April 2017, when IR35 was first changed for the public sector. These proposed offset changes for off payroll working rules will have a significant impact on contractors and the industry as a whole.
This is a departure from the current process by which there was concern over double taxation as the deemed employer, or sometimes the contractor, must pay the full PAYE and NIC amounts due while the contractor claims a refund for corporation tax and wrong income tax already paid.
The New System and its Impact
The offset mechanism will affect tax liabilities for contractors and employers in the case of misclassification of a contract. Understanding the change that this will have on the contracting landscape is vital for off payroll workers as there is likely to be an increase in contract opportunities.
This is not to say that wrongly determining your status is now risk free as there are still hefty fines for wrongly operating as if you are outside the scope of IR35. There are also interest payments due on any arrears meaning that it is still costly to get wrong
If you are unsure where the burden of determination falls or need more clarification over a contract then you should contact Sherwin Currid, experts in IR35 legislation and contracting, to ascertain where you stand.
How Will This Impact Contractors?
If a contractor’s status is correctly determined then this will be no different to operating under the current rules. It will give contractors and end clients greater peace of mind that they will not be unfairly taxed after a tax tribunal and will only have to pay the actual amount of tax due, plus any fines for the initial error.
It may seem initially unfair that there is no refund due to the contractor but actually the PAYE liability and employee NICs from working as an employee are almost certainly higher than amount of tax paid by working through a limited company. The result of the offset changes will not result in a disproportionate tax bill and should simplify the tax system for arrears.
Contact Sherwin Currid for an Informal Consultation on IR35 and Your Status Today.