It feels like the government’s efforts to get to grips with tax administration for so-called ‘off-payroll’ working arrangements have been rumbling on forever.
In fact, you have to go back almost 25 years to the days of Tony Blair’s Labour government to find the origins of IR35. The ‘intermediaries legislation’ introduced way back when was meant to close what was seen as a tax loophole for contractors working to all intents and purposes as if they were employed by a single firm, but receiving remuneration via a limited company to lower their Income Tax liabilities.
Condemned almost from the start as a clumsy and near unworkable piece of legislation shot full of vague definitions and gaping holes, David Cameron’s Tory government set its sights on reforming the original IR35 regulations. Cameron himself was long gone by the time those reforms came into effect – for the public sector only – in 2017. They were finally rolled out for private sector contractors in April 2021.
The main thrust of the changes was straightforward – rather than entrusting it to contractors themselves to declare their IR35 status, which not surprisingly hadn’t resulted in too many owning up to their ‘disguised employment’ status, it would now be the end client who was held responsible for determining what was genuine, by-the-book outsourcing to contractors, and what was, in fact, off-payroll employment.
Not only that, but if someone was to fall foul of IR35 rules, it would be the fee payer (often a recruitment agency) who was liable for any penalties and backdated tax. Cue mass panic about hiring contractors.
Yet barely two years after the reforms rolled out in full, the government announced in April this year that it was holding a new consultation with a view to changing IR35 rules yet again. What is going on with them this time?
Ending double jeopardy on IR35 repayments
Right from the very start, IR35 has been dogged by oversights in how its rules have been formulated. Originally, it was vagaries in the definitions of what did and did not count as ‘disguised employment’, which left everyone scratching their heads.
In the latest iteration, it was tax already paid by contractors deemed to have fallen on the wrong side of IR35 rules that got overlooked. People working via a limited company ‘intermediary’ don’t escape paying Income Tax at all, of course. But they can pay less by, for example, paying themselves mostly in dividends from their limited company’s profits, rather than as a salary, as dividends are subject to lower rates of Income Tax.
But since the reformed rules came into effect, HMRC has been backdating tax calculations based on the full amount the person would have paid had they been on the payroll, without taking into account tax they had actually paid during the relevant period. In effect, tax ends up being paid twice – at the lower rate deemed incorrect under IR35 rules before the issue comes to light, and then at the standard rate afterwards. And it is fee payers liable for repayment who are paying too much.
The consultation is on the need for and possible methods of addressing this. The solution seems straightforward – subtract whatever tax has already been paid by the contractor from the repayment calculation.