Understanding the IR35 Changes: A Guide for end-hirers

As of April 6th, 2024, significant changes to the off-payroll (“IR35”) legislation have come into effect, reshaping the landscape for contractors and clients alike.

Pre-April 2024 Challenges:

Before these changes, HMRC’s ability to challenge Outside IR35 determinations posed significant risks for recruiters and end clients. If HMRC successfully challenged an outside IR35 determination, clients could face PAYE and NICs liabilities, alongside fines and penalties. Crucially, any taxes already paid by the contractor and their Personal Service Company (PSC) weren’t considered, leading to potential “double taxation” for HMRC.

April 2024 Onwards:

The new rules bring a crucial amendment: taxes already paid by the contractor and their limited company can now offset the PAYE/NICs liabilities owed by the client. This change reduces the client’s tax bill and therefore minimises their risk, preventing double taxation and providing a fairer tax assessment process.

Key Considerations for HMRC:

HMRC will adopt an “assumption and best judgment” approach to estimate taxes paid by contractors for roles outside of IR35. Deductions will be applied when HMRC enquire into a determination and conclude that the contract was not outside IR35 and reclassify it as being inside IR35.  Taxes considered for the offset include Corporation Tax, Income Tax, Employee NICs and tax on dividend payments.

What Clients Should Know:

Clients, particularly those in supply chains involving agencies, must ensure that necessary information about contractors is collected. This includes full names or National Insurance Numbers (NINOs), intermediary or partnership details, Company Reference Numbers (CRNs) or VAT Registration Numbers (VRNs), and partnership reference numbers.  It is also crucial that checks are made to ensure the contractor and their PSC have paid the taxes due as if they haven’t then no offset will be available.

Expected Industry Impacts:

These changes are anticipated to have several industry-wide outcomes:

  • Off-payroll Offsets: Financial risks associated with incorrect outside IR35 determinations are expected to decrease significantly, reducing to approximately 15-20% of the assignment rate.
  • Reduction in Blanket Bans: Due to a much lower risk profile, clients are likely to be more open to managing IR35 correctly, moving away from blanket bans on engaging with contractors.
  • Market Shift: A shift back to Personal Service Companies (PSCs) from Umbrella arrangements is anticipated, reflecting changes in risk perceptions and tax implications.

In summary, the IR35 changes represent a fundamental shift in how tax liabilities are assessed and managed within the contractor-client dynamic. Understanding these changes is crucial for navigating the evolving landscape of contracting in the UK.

If you have any questions regarding the legislation or think you business needs help with compliance, please don’t hesitate to get in touch with the team!