Contractors could reclaim tax if client wrongly applies IR35

Contractors could reclaim tax if client wrongly applies IR35

Contractors could claim back tax if HMRC successfully argues that a business misapplies IR35 

HMRC has admitted that contractors could be entitled to reclaim tax if their end-client has made a wrong IR35 determination.

In April 2021, medium and large businesses became responsible for determining the IR35 status of contractors – previously, this liability fell with the contractor. 

The move was made by the government to crack down on suspected tax avoidance from so-called disguised employees.

Since IR35 reform, businesses found to have incorrectly assessed a contractor as outside IR35, could end up paying a hefty tax bill, which would include the full PAYE and national insurance contributions of that contract.

HMRC admits it does not consider tax already paid

However, HMRC told the Financial Times that it does not offset the Income Tax and Corporation Tax already paid by the contractor when issuing these tax bills to organisations. 

IR35 reform came into effect in the public sector in 2017 and the tax authority has already handed numerous government departments tax bills and penalties for non-compliance, totalling £263 million.

Andy Chamberlain, director of policy at self-employment trade body, IPSE, highlighted that the taxman can “retrospectively collect tax from a client or agency if it determines that IR35 should have applied.”

He said: “No consideration is given as to whether tax has already been paid on that income by the contractor, creating a clear risk, likelihood even, that too much tax will be collected in total.

‘Ludicrous anomaly’ highlights ‘absurdity of IR35 changes’

“The suggestion is the contractor could reclaim any tax he or she has paid, meaning that income from that engagement is effectively to be treated as tax-free earnings for the individual. If the contractor does not reclaim the tax, we assume HMRC simply keeps it. 

“It’s a ludicrous anomaly that highlights the absurdity of the IR35 changes. If this issue cannot be resolved, the reforms as a whole should be reconsidered. 

“HMRC must ensure not only that it collects the correct amount of tax, but that it is collected from the correct taxpayer.”

HMRC faces ‘administrative nightmare’

Seb Maley, CEO of IR35 insurance firm, Qdos, echoed Chamberlain’s concerns, adding that “it will be an administrative nightmare for HMRC.”

He said: “As made explicitly clear within the NAO’s investigation into the IR35 reform, HMRC has no places to deal with the subject as issues stand.

“Left unresolved and HMRC will net more tax than it’s actually owed, creating a massive problem when contractors quite rightly start the process of reclaiming the tax they’ve already paid to the treasury.”

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