tax return headed paper

New tax year brings an end to ‘grossly unfair’ double taxation of IR35 

Long-awaited fix reduces financial risk for businesses – and may lead to an increase in outside IR35 engagements

Effective 6th April, businesses will no longer be overtaxed when settling an IR35 liability for incorrect status determinations.

The move brings an end to the ‘double taxation’ of IR35 under the off-payroll working rules and will see HMRC automatically offset the taxes already paid by a contractor when issuing a business with an IR35 bill.

Ahead of its introduction, HMRC has been trialling the new offset mechanism since September last year. This means that some businesses issued with IR35 bills have already benefitted from the change, with their liabilities reduced as a result.

Going forward, the move is also likely to offer something of a boost to contractors. With businesses no longer facing an excessive tax bill for incorrectly operating the rules, clients may become less risk-averse in their status determinations and engagements – potentially leading to more outside IR35 opportunities. 


‘Double taxation’ explained

The ‘double taxation’ of IR35 under the off-payroll working rules has been a deterrent for businesses seeking to engage contractors. 

The issue arises when the tax office attempts to recover the liability associated with an inaccurate IR35 determination. HMRC issues the business with an IR35 bill, but when calculating the liability, doesn’t account for the taxes that the contractor has already paid.

As a result, the business ends up paying more tax than is owed. The prospect of ending up in this position has seen many businesses adopt a risk-averse approach to engaging contractors. 

From 6th April, the new offset mechanism means that HMRC will now automatically account for taxes paid by a contractor – such as income tax and corporation tax – when issuing an IR35 bill to a business. 


End of ‘grossly unfair’ flaw

Writing for Contractor Calculator last year, Dave Chaplin described the ‘double taxation’ under IR35 as “grossly unfair on businesses” who have previously been “threatened” with disproportionate tax bills.

As a result, he welcomed HMRC’s plans to address the problem. While the tax office had only set out its intention to consult on the issue at the time, Chaplin said that “the speed and narrow focus of the single solution” presented by HMRC was more like a formal announcement. 

That certainty was good news for those “firms currently under HMRC’s radar”, Chaplin said. These businesses will now be able to take “considerable comfort” from the introduction of the offset – particularly given that the offset fix applies retrospectively; “all the way back to April 2017”, or the introduction of reform in the public sector.

From 6th April this year, any businesses with unsettled tax bills will see their total liability “reduced by approximately 75% – to align with the correct and fair amount of tax owed”, Chaplin concluded.

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