HMRC to Resolve IR35 Double Taxation Issue
The double taxation problem faced by many businesses and off-payroll workers could be resolved soon as HRMC moves to amend IR35 legislation. The upcoming offset changes scheduled for April 2024 will apply to ongoing off-payroll working (IR35) audits, as well as compliance checks and disclosures.
The move comes after HMRC launched a consultation on the IR35 off-payroll working rules earlier this year, with a strong focus on the possibility of eliminating the double taxation problem.
Excessive Tax Obligations Caused by IR35
As things stand, the controversial legislative issue means HMRC accumulate more tax funds than they should. This is because the tax authority is failing to credit the tax that has already been settled by a contractor when presenting a tax invoice to a business.
The issue has caused the tax obligations of multiple businesses to exceed the fairly calculated due amount, sometimes by as much as four times the initially perceived tax underpayment.
The news of the move by HRMC was first shared by Angela Ferguson, Head of Employment taxes at public sector tax experts PSTAX. Other experts in the field have also been commenting, including Seb Maley who is the CEO at contracting and self-employment firm Qdos. Maley said: “The double taxation of IR35 meant that businesses get overtaxed in the event of non-compliance, which meant they were less inclined to engage contractors. Remove this problem and the perceived risk of engaging contractors is reduced.”
What HMRC Changes to IR35 Mean
The CEO of compliance company IR35 Shield, Dave Chaplin, explained: “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.
“It’s unlikely this would have happened, but without the clarification in statute, the tax tribunals would have needed to resolve the issue.”
Changes to Off-Payroll Working Rules
Changes were made to rules concerning off-payroll workers both in 2017 and 2021, but these were then mean to be changed again after the notorious September 2022 mini-budget. The UK government’s Growth Plan described plans to reverse the 2017 and 2021 changes in an effort to simplify the UK tax system. However, the government later repealed the changes to much criticism.
Since the recent eight week long consultation on the IR35 off-payroll working rules, the government is once again seeking to rectify the oversight of their repealing of the changes to the original changes of the off-payroll working rules.
Chaplin describes the move by HMRC as ‘no surprise’ due to the narrow focus of the consultation. He adds: “HMRC dragged their heels on this issue for three and a half years and refused to budge on their position at an IR35 Forum meeting in September 2021.
“It’s only when a large group of us involved MPs, Ministers, Select Committees and the National Audit Office, that the Treasury finally acknowledged the flaw, announcing in December 2022 that the issue would be resolved.”
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