The Autumn statement 2023 was regrettably light on measures to improve things for contractors, but the Government has at least announced action to end the “double taxation” issue within IR35. In this article we’ll look at the announced changes, and what they mean for contractors and their clients.
What is the IR35 double taxation issue?
This issue can occur when HMRC bills an end client or “fee payer” for unpaid tax arising from an incorrect IR35 decision. At present, none of the tax the contractor has already paid will be taken into account on this bill, leading to HMRC collecting more tax than they should. In fact, businesses have reportedly found themselves facing tax obligations of more than four times the initial underpayment.
As a result of this increased risk, many end clients are reluctant to engage contractors outside IR35, even when it would be safe and more cost effective to do so, which in turn means many contractors are paying more tax than necessary.
What’s happening to change this?
Following a consultation earlier this year, from April 2024 HMRC will have the power to offset tax and NI already paid by the contractor or their Limited company against a subsequent PAYE liability of their deemed employer. This effectively means the tax you’ve already paid can be taken into account on any bill your client or agency receives as a result of an incorrect IR35 determination.
How does this affect contractors?
The double taxation issue has meant that accidental non-compliance can be disproportionately expensive for the fee payer or end client. This can lead to blanket “inside” decisions, a refusal to engage contractors through a limited company, or even a reluctance to engage contractors at all.
This reduction in the perceived risk has the potential to increase the availability of contracting roles, and see more clients being comfortable engaging PSC contractors outside IR35, which can only be a good thing for contractors.
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