IR35 changes coming April 2024: What this means for you

IR35 has always been an inconvenience to both contractors and employers alike. Since it was introduced to the private sector back in 2017, there have been headaches for all parties concerning what was deemed to be inside or outside of IR35, additional administrative burdens and, of course, the issue of “double taxation”.

It was announced last year that HMRC intends to reform the legislation in April 2024, which will alter how IR35 operates, particularly for those roles that sit outside of it. The changes will be well received by contractors and businesses, and some experts predict that it’ll see roles outside of IR35 dominate the space by the end of 2024.

How positions outside of IR35 used to work

To understand the new changes, we’ll first look at how positions outside of IR35 work currently, highlighting the issue of “double taxation”.

• A contractor is approached outside of IR35: the client determines the status of this and whether the contractor sits inside or outside IR35 when they hire them.
• HMRC investigates the client: As part of compliance checks, HMRC opens an investigation into the client to validate the accuracy of its determinations.
• HMRC finds that the client has incorrectly determined the contractor outside of IR35. This means that the contractor’s fee should have been subject to PAYE deductions and National Insurance contributions from both parties.
• The client is issued a tax bill for the missing payments. Here, the client is the fee-payer, so they are responsible for any PAYE liability and are required to pay as soon as possible.
• The bill is not subject to any deductions from the tax that’s already been paid: The contractor will have already paid tax or is set to do so on this fee, but this isn’t accounted for in the PAYE liability, which means…
• The client is taxed again: HMRC collects more tax from the client, having already deducted PAYE, Income Tax and National Insurance. The client, therefore, pays additional Employers NICs and, if they qualify, the Apprenticeship Levy.

This process and the subsequent issue of “double taxation” has been a problem since the legislation changes in 2017 and have led to many companies enforcing blanket bans for roles outside of IR35 to avoid the risk.

How IR35 is changing

Under the new changes, which will come into force on April 6^th, 2024, HMRC will use “assumption and best judgment” to reach an estimated value of taxes already paid by the contractor when dealing with roles outside of IR35. This means that instead of the full amount of tax being taken by HMRC twice, some deductions will be made when a role moves from outside to inside IR35 instead.

HMRC will take the following into consideration when making those deductions:

• Corporation Tax – via the client or recruiter
• Income Tax and Employer NICs are paid to the contractor – via the client or recruiter
• Tax on dividend payments
• Class 2 and 4 NICs

Employer NICs and the Apprenticeship Levy don’t appear on that list, so there is still a chance of doubling up on those payments. These changes will apply retrospectively for arrears dating back to April 2017 for public sector businesses and April 2021 for those in the private sector. However, for liabilities that have been settled, these rules will not apply, meaning you’re unable to claim back any “double taxation” payments.

How will this affect the contract market?

While this is a relatively minor update, it could have a large impact on the number of roles that appear outside of IR35, with the risk significantly reduced to businesses. Some experts suggest that by the end of 2024, two-thirds of all contract roles in the UK may sit outside of IR35.

How big an impact this change will have is yet to be seen, but it’s something that most businesses should be aware of, as it could drastically reduce the administrative toll on your contract team.

If you’re looking for advice on contract hiring strategies, speak to our interim expert, Joshua Morris, joshua@absolute-recruit.com.