HMRC launches ‘potentially game-changing’ IR35 review

HMRC has today announced the launch of a consultation on the IR35 off-payroll working rules, with a view to eradicate the “massive problem” of double taxation.

At present, the controversial legislative quirk allows HMRC to collect more than it should by not offsetting the tax already paid by a contractor when handing a business a tax bill. This has resulted in numerous cases of businesses being faced with tax liabilities more than four times the perceived underpayment of tax.

The review, which will run for eight weeks until June 22, will consult on a “possible change” to this. This would see the introduction of new legislation to share the tax liability between the client and the worker, by estimating an offset for tax already paid by the worker and their intermediary.

HMRC is also planning for this offset to be retrospective for unsettled bills spanning back to April 2017. This will mean that any bills already issued and not settled can be reduced by approximately 75%.

The news has been welcomed by Seb Maley, CEO at IR35 specialist firm Qdos, who argues that double taxation is “morally wrong” and that progress on the matter is long overdue.

“A consultation marks progress. In theory, it’s an issue which can and should be solved relatively easily too. I’m amazed that the government has refused to look into this until now.”

Double taxation ‘grossly unfair’

This is echoed by prominent IR35 critic Dave Chaplin, CEO of compliance firm IR35 Shield. The clear signalling of speed and focus from HMRC on the matter will be welcome news to contractors, he says.

“Whilst this is labelled a consultation, the speed and narrow focus of the single solution reads like an announcement. The short consultation window of only eight weeks, followed by a response later this year, is a clear signal that the fix will be happening in the next finance bill 2024.”

Chaplin also adds that the double-taxation feature was “grossly unfair” on businesses, and that the review means the Conservative government “have finally heard the banging drums”.

But Susan Ball, employment tax partner at RSM, expresses concern over the fact that the legislation will only apply retrospectively for unsettled tax bills. This may encourage some hiring organisations to “procrastinate”, she says.

“If implemented, the new rules will not come into force until April 2024. This means hiring organisations may be tempted to drag their heels with any HMRC compliance checks in the meantime.

“Typically, a case can take 18-21 months to conclude, and we may see organisations procrastinating over any HMRC compliance checks in the hope that they can take advantage of the new rules when they are introduced.”