Government consultation into double taxation is welcomed across industry
A potential change to the off-payroll working rules, which could resolve the problem of ‘double taxation’ has been announced by the government.
The consultation was launched on the 27th of April and will conclude on the 22nd of June. It sets out the government’s intention “to implement a legislative solution from 6th April 2024” – the start of the next tax year.
This would present a solution to the issue of double taxation, which has been problematic since 2017 when the introduction of the off-payroll working rules in the public sector was introduced.
Where HMRC has found that a contractor has been wrongly operating outside IR35, under the off-payroll working rules the fee-paying party is liable for the taxes that should have been paid on the worker’s fee.
However, this liability does not take into account the taxes that the contractor would have already paid, as HMRC is unable to offset the tax it has received against the outstanding bill. The consultation is exploring ways to correct this.
The expedited timeline is a result of “significant… informal consultation with key stakeholders”. This collaborative approach yielded “positive and constructive engagement [that] has led to the identification of a possible option… which forms the basis of this consultation”.
If introduced, the change is likely to apply retrospectively, effective from the 6th of April 2017. As such, engagements undertaken since that date will be covered in the event of an IR35 investigation.
Double taxation explained
The consultation has been welcomed by industry bodies, including IPSE.
Writing in response to the launch of the consultation, Andy Chamberlain – Policy Director at IPSE – called it “a sensible move” and one “which IPSE fully supports”.
He also said that the double taxation trap “contributed to the huge over-compliance we’ve seen since the rules changed”, leading to blanket assessments and blanket contractor bans.
This has been the case since the implementation of the off-payroll working rules in the public sector, in 2017. Incorrect IR35 status determinations – and the tax liability that they carry, including double taxation – disincentivised businesses from placing workers ‘outside’ of IR35.
Where HMRC deems contractors to have been incorrectly placed outside of IR35, it chases the fee-paying party for the taxes it is owed. But the contractor will have already paid tax on this income – meaning the taxman pockets more than is actually owed.
IPSE had previously campaigned for “a ‘set-off’ mechanism” to prevent double taxation, and over concerns that the “huge risk” shouldered by end-clients would force businesses to place workers ‘inside’ IR35.
As a result, the organisation is optimistic that solving the double taxation burden “might embolden clients to take on more contractors in ‘outside’ IR35 roles”.
A positive, if not perfect, development
IPSE’s response acknowledges that “this legislative fix is not the answer to all our prayers” and suggests that scrapping IR35 altogether would be preferable.
On the whole, however, the body recognises that the development is good news for contractors and the businesses engaging them.
IPSE also believes that “in most cases, the set-off will substantially reduce the liability borne by the fee-payer and it will remove the danger of double taxation”.
As such, the consultation has the potential to “unclog supply chains a little and make it easier for firms that want to engage independent, flexible workers”.
Chamberlain is also cautiously optimistic about the “unusually short” consultation period, “which perhaps suggests the government is keen to get on and legislate this”.
While the consultation is open, businesses are invited to respond to it to help HMRC understand the impact of any further changes to IR35.
Visit the consultation page for more information, including details on how to respond.
Good to see there are some changes that may make more sense in the IR35 space.
How is an employer identified in Inside IR35 arrangements? The logic of freelancers paying Employers NI to an umbrella company for onward transmission to HMRC is a farce. I have recently rejected an inside IR35 contract because paying employers NI tax makes it unviable. This was alongside the requirement that I had to operate as a named individual into the umbrella company and was not allowed to operate through my company. Essentially umbrella companies are operating as employee aggregators if I’m not mistaken. So, why would the Umbrella company be permitted to dodge Employers NI and be allowed to pass it down to their pseudo employees? I suspect this is because they are bureaucracy factories that generate limited income and have zero productivity as organisational entities…where would they get the money from to pay Employers NI if they don’t get it from the clients? Why aren’t clients or umbrella companies charged Employers NI when they effectively ’employ’ inside-IR35 contract staff? How is this allowed? I’m intrigued and out of the system until it makes sense to return.