Government launches consultation on IR35 double taxation

Eight-week consultation on legislative reform could result in change that incentivises businesses to engage contractors

The government has launched a consultation to investigate a possible change to the off-payroll working rules, which would eradicate the issue of ‘double taxation’.

The consultation was announced on the 27th of April and will run for eight weeks, concluding on the 22nd of June. During this time, HMRC will seek submissions from businesses on the impact of any potential change to the rules.

In effect, the double taxation of IR35 occurs in instances of incorrect status determinations made by businesses. Where this happens, the fee-paying party (either the end client or the recruiter) is liable for Income Tax and NICs.

However, the contractor will have already paid a significant amount in tax when operating outside IR35. HMRC doesn’t factor in the tax already paid by the contractor when issuing a business with a tax bill, resulting in the double taxation.

The consultation will seek to remedy this, and its announcement is a welcome development. 

The issue of double taxation

The issue of double taxation is something that Qdos has campaigned to raise awareness of in recent years.

This has been highlighted by the National Audit Office and Public Accounts Committee and occurs in cases of non-compliance. Where this happens, “HMRC may end up collecting more tax than is due because the worker and their intermediary may have already paid tax and NICs on the same income”, according to the consultation page.

In short, HMRC collects tax revenue twice – once from the business and once from the contractor. Despite this clear flaw in the legislation, there is no mechanism that allows HMRC “to set off amounts of tax and NICs already paid by a worker and their intermediary against the PAYE liability of the deemed employer”.

This places an excessive tax risk on businesses, in turn leading to equally problematic circumstances for contractors, such as blanket IR35 determinations and zero-rights employment. Fortunately, the purpose of this consultation is to explore ways HMRC can resolve this.

In cases where HMRC has collected the taxes from both parties, it notifies a contractor of the right to a refund. However, this process is little more than a workaround. The consultation should ensure a properly designed and more effective legislative arrangement, which could come into effect as soon as April 2024.

So, the double taxation of IR35 could be fixed as early as next year. As such, it’s a rare reason for optimism where IR35 is concerned, and it could help to encourage firms to engage contractors. 

A “potentially game-changing” solution

The launch of this review is an important step in the right direction. It marks an opportunity to address some of the misbalances in how tax liabilities are calculated, with our CEO Seb Maley describing it to The Telegraph as a “potentially game-changing” moment.

“The double taxation of IR35 under the off-payroll rules is a massive problem. HMRC doesn’t offset the tax already paid by a contractor when handing a business a tax bill. Put differently, it means HMRC collects much more than it should. It’s morally wrong. 

“A consultation marks progress. In theory, it’s an issue which can and should be solved relatively easily too. Even so, I’m amazed that the government has refused to look into this until now. Westminster knew this was a problem some time ago, but has done nothing about it.

“The double taxation of IR35 gives needlessly risk-averse businesses another reason not to engage contractors – because if they’re found to be non-compliant, HMRC will over-tax them.”

Those wishing to respond to the consultation can contribute either by email or post, with more information found on the government’s consultation page.