ir35 office working

HMRC trialling ‘offsetting’ IR35 rules ahead of proposed changes 

Public sector consultant announces imminent solution to long-standing problem

A tax consultant has revealed that HMRC plans to allow those businesses currently facing compliance checks the opportunity to “benefit from” the new offset rules it had consulted on earlier this year.

The news, reported by Computer Weekly, appears to demonstrate that HMRC is effectively giving its new rules a trial run, ahead of the expected launch of an official offset mechanism at the start of the next tax year (6th April 2024).

This follows a consultation held between 27th April and 22nd June, which aimed to find a legislative solution to the problem of double taxation. The issue has existed for end-clients and contractors since the introduction of IR35 reform in the public sector in 2017.

It is a development welcomed by experts, who have said it will reduce some of the complexities and challenges that contractors and their engagers face.


The double taxation trap

Since the off-payroll rules were introduced in the public sector, fee-paying parties have been liable for any incorrect IR35 status determinations, and the tax liability these decisions carry.

This has served as a deterrent to businesses engaging workers in a genuine, ‘outside IR35’ capacity. 

Often, when an organisation is deemed to have incorrectly determined a contractor’s IR35 status (and operates as the fee-paying party in the supply chain) they are liable for the employment taxes.

But HMRC’s calculation of the liability fails to account for any taxes – such as Corporation Tax – already paid by the contractor. In effect, this means HMRC overcollects tax. 

Contractors can claim back any tax they have paid for engagements in which their status has been incorrectly determined. However, doing so is a complex process and, as reported by Computer Weekly, it is “unclear how many individuals have pursued this” option.

Bodies such as IPSE have previously campaigned for an offset mechanism to avoid such a scenario, due to concerns that the double tax trap would lead to blanket assessments and placements of genuine contractors in ‘inside IR35’ roles. 


“Hot off the press”

Angela Ferguson, the consultant who made the announcement on her personal LinkedIn Profile, is a Director and the Head of Employment Taxes at PSTAX, a firm which advises public sector bodies. She has worked in tax consultancy for 30 years, and IR35 is one of her specialisms.

In her LinkedIn post, Ferguson said: “I have just been informed by HMRC that they are going to let current off-payroll working (IR35) audits/compliance checks/disclosures benefit from the proposed offset changes set to be introduced in April 2024”.

HMRC is “offering clients the opportunity to pause their compliance check if the case meets certain conditions”, Ferguson wrote. “The employer can then benefit from the proposed offset changes coming in from April 2024”.


Move may mean a “rethink” for risk-averse engagers

Commenting on Ferguson’s post on LinkedIn, Dave Chaplin – CEO of IR35 Shield – said he was “glad to hear” the news, despite that it “took us all years banging the drum” to see change. 

Speaking to Computer Weekly for their report about the potential change to double taxation, Chaplin expanded:

“For clients and contractors, it is essentially business as usual. The changes mean that if they get an IR35 status determination wrong, they won’t be hit with a disproportionate tax bill compared to the actual amount of tax underpaid”, he said.

“The (double-taxation) flaw was one reason many firms may have blanket banned the use of contractors, and this fix may encourage those firms to rethink their position”, Chaplin concluded.

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