A legislative fix to off-payroll working rules taking effect on April 6th should reduce the perceived financial risk of engaging contractors commonly known as contractor blanket bans
The start of the new tax year today – 6th April – brings with it long-awaited changes to the off-payroll working rules that could prove to be the “catalyst” for more freelance and contract opportunities, according to IR35 experts.
Amendments to the off-payroll working rules will prevent businesses from being ‘double taxed’ in the event of non-compliance when engaging these workers. Qdos, the contractor insurance firm said it could “spark life” back into a market that has suffered as a result of the introduction of the off-payroll working rules in the public sector (2017) and private sector (2021).
Why did double taxation occur in the first place?
Under the off-payroll working rules (often referred to as IR35 reform), businesses are responsible for determining the IR35 status (tax status) of freelancers and contractors they engage. If they incorrectly class a contractor as self-employed when their employment status reflects employment, these businesses can be left with tax bills made up of employment tax that should have been paid as part of the assignment.
However, when calculating this liability, HMRC has historically not offset the tax already paid by the contractor (income tax, dividend tax, corporation tax) on that engagement. It means businesses are taxed more than they owe.
It has led to the phrase ‘double taxation’, with businesses facing inflated tax bills, often amounting to tens of thousands more per contractor engaged.
This flaw in the legislation has increased the perceived risk of engaging contractors, with many businesses opting to blanket ban contractors or insist they operate via PAYE in response to the introduction of the off-payroll working rules.
For example, a population of 500 contractors over a 3-year period would likely have paid over £50m in corporation tax and dividend tax. This will now be offset from any tax bill levied at private sector businesses.
Having previously consulted on the issue, the government confirmed in the Autumn Statement that this legislative fix would be introduced from 6th April (2024/25 tax year) onwards. It will also apply retrospectively, meaning businesses caught up in investigations will benefit.
“Make no mistake, this is a game-changing moment and one that significantly reduces the perceived risks associated with engaging freelancers and contractors,” says Qdos CEO, Seb Maley.
Businesses should no longer be overtaxed by tens, potentially hundreds of thousands of pounds for every contractor they engage under the wrong IR35 status.
“This long overdue fix will have big implications for independent workers too,” says the Qdos CEO. “With the end of double taxation, I expect more businesses to engage contractors outside the clutches of IR35 – something that many had decided against following the roll-out of the off-payroll working rules.”
Maley is confident this legislative change should give businesses the confidence they need to engage genuine contractors in the most cost-efficient and flexible way.
“It’s not an overstatement to say that it could spark life back into the market, becoming a catalyst for more freelance opportunities, he says.
Can companies and contractors who have overpaid tax in the past be refunded?
“Not automatically, no,” Maley tells The Freelance Informer. “For contractors who have suffered as a result of the double taxation, they need to make an overpayment claim as soon as possible. If the tax bill was paid more than four years ago, there’s no guarantee that HMRC will accept the claim for a refund. Although, given the amount of money involved, requesting a refund is certainly worthwhile. Businesses that have been double taxed are likely to need to go through the same process.”
Was it a double or quadruple tax threat?
Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, says the changes will being good news to the flexible economy, contractors and hiring firms. However, in his estimations the threat was much larger than many people including the HMRC suggested.
“The fix to the flaw is undoubtedly a welcome measure for firms, and HMRC can no longer wield the threat of a disproportionate tax bill to encourage firms to push all their contractors onto payroll,” says Chaplin.
He continues, “It’s certainly true that there was a “double-taxation” threat because the same money was being taxed twice. However, in terms of the amount of tax, it was, in fact, a “quadruple-tax” threat – because the amount of tax due was four times what was needed to be paid to balance the position.”
How are the offsets calculated?
Chaplin says as a rule of thumb, the offsets or the additional tax to pay, will be “about 10-15% on top of the fees paid for the contractor.”
Here he gives an example to explain his point, “So, let’s say a firm with 100 contractors gets 10% of its Outside IR35 assessments wrong – which would be a very high figure anyway – the extra tax due would be around 1-1.5% on top of the total contracting bill for the flexible workers.
No need for blanket bans
“Because the tax offsets are now automatically baked into the legislation, where firms have made mistakes, settlements will be far quicker and easier to resolve and avoid the need for firms to go to expensive and time-consuming tax tribunals.
“Firms don’t need a blanket ban approach anymore. If firms show they have taken reasonable care, HMRC will likely be satisfied that the correct tax is being paid,” says Chaplin.