Finance Act confirms end to ‘double taxation’ of IR35 

One less flaw to contend with – but what does this change to the off-payroll working rules mean in practice?

Seven long years on from the introduction of the off-payroll working rules in the public sector and three since the private sector changes, the government is bringing a belated end to the ‘double taxation’ of IR35. 

This has been confirmed in the Finance Act 2024, which received Royal Assent on 22nd February. In simple terms, this means that the measures set out in the Act – which are primarily those announced at last year’s Autumn Statement – will come into force soon.

Effective 6th April, businesses will no longer bear an excessive tax burden for mismanaging the off-payroll working rules. 

This a major win and one which many businesses, industry bodies and experts have campaigned for in recent years. Needless to say, at Qdos we’ve welcomed this long overdue tweak to the rules. 

Below, we’ll explain what the ‘double taxation’ of IR35 is, along with what the eagerly anticipated removal means for contractors and the businesses engaging them…

So… what’s this all about?

Before diving in and unpicking the technical details, it might be useful to remind you exactly what ‘double taxation’ is.

In short, where a contractor has been incorrectly engaged outside of IR35 by a business, HMRC looks to recover the PAYE and national insurance liability from that engagement. Assuming all legal obligations have been met in the supply chain, this is recovered from the fee-paying party. 

The problem, though, is that when issuing the fee-paying party with a bill for their liability, HMRC fails to account for the taxes already paid by the contractor on their fee. By not offsetting these taxes, HMRC collects more tax than it’s owed – hence, ‘double taxation’. 

 
What does the Finance Act say?

 Time for the technical aspect. The Finance Act 2024 introduces an amendment to another piece of legislation, the Income Tax (Earnings and Pensions) Act 2003. ITEPA 2003, for short. 

This determines how HMRC recovers PAYE liabilities. The amendment allows “for an amount to be treated as having been recovered from the payee, and for that amount to be recoverable from the payer”. 

This applies when “an amount of income tax or corporation tax has already been paid, or assessed, in respect of income referable to that payment”. This will be “the best estimate which can reasonably be made by an officer of Revenue and Customs”.

In layman’s terms? Where a contractor has already paid income tax or corporation tax, the amount they’ve paid is deducted from the liability to be recovered from the fee-payer. 

Put differently, this adjustment will resolve the issue of ‘double taxation’.

 
An IR35 milestone

That makes the change sound quite understated – but to be clear, this is a significant development and one the government has been under mounting pressure to address since the roll-out of the off-payroll working rules in the public sector. 

Speaking to Accountancy Age back in September, our CEO, Seb Maley, identified the major issue with the previous set-up: that “businesses get overtaxed in the event of non-compliance, which meant they were less inclined to engage contractors”.

“Remove this problem, and the perceived risk of engaging contractors is reduced’, he added.
 

 What does this mean for contractors?

So – less perceived risk around engaging contractors. What will that mean for the UK’s flexible workers?

It should lead risk-averse businesses to soften their stance on engaging contractors. Reducing the financial burden – potentially by thousands of pounds per contractor – is a considerable change, and should boost confidence among businesses.

 
And what does it mean for businesses?

Firstly, from 6th April 2024 businesses will not be ‘double taxed’ if they were to be found of wrongdoing by HMRC. This change is set to apply retrospectively, too – all the way back to 2017.

Ultimately, it means there’s one less reason for businesses to make blanket inside IR35 determinations or insist that contractors operate on the payroll irrespective of their true IR35 status. 

It also simplifies the off-payroll working rules to a degree, giving businesses more visibility of their potential risk. 

Any simplification to these notoriously complex rules is good news, in our books. This should make it easier for businesses to compliantly manage them.