IR35 update 2024: Key changes to off-payroll working rules
The IR35 off-payroll working rules are one area of tax legislation that is constantly evolving. After a tumultuous couple of years for organisations and contractors, particularly regarding the mini-budget of September 2022, there are thankfully some less radical changes to get to grips with in 2024.
New offset rules are set to come into force in April 2024 to resolve the current double taxation problem. The new rules represent a minor tweak to the legislation, although it could have a significant financial impact in certain situations.
In this article, we’ll explore the IR35 changes for 2024 and discuss the impact the new off-payroll working rules will have on organisations and the industry as a whole.
What is off-payroll working? An IR35 overview
Off-payroll working, sometimes referred to as IR35, is an initiative created by His Majesty’s Revenue & Customs (HMRC) to ensure a contractor pays roughly the same amount of Income Tax and National Insurance as an employee.
The rules define a situation where a contractor, consultant or small business owner provides services to an end client through their own intermediary. They prevent contractors from working as ‘disguised employees’ and ensure that any funds paid in respect of the contractor’s services are subject to PAYE. This is all part of a business’s payroll process.
Changes to your off-payroll responsibility from April 2024
On 27 April 2023, The UK Government announced that it was seeking a solution to the double taxation problem under IR35, which occurs when HMRC successfully overturns an ‘outside IR35’ determination. This is known as the ‘offset-issue’. It subsequently launched a two-month consultation, with the formal response expected to be published before the end of 2023.
As things stand, if HMRC successfully challenges an outside IR35 status determination, the employer has to pay all the Income Tax and National Insurance Contributions (NICs) owed on their earnings. However, tax has already been paid by the contractor’s limited company, leading to a double taxation charge.
Under the current rules, HMRC will notify the contractor that they have the right to claim a refund for the tax they have already paid. However, the process is overly complex and not a route many contractors take. This has been an issue since the IR35 off-payroll rules were first introduced in 2017.
What the new offset rules will allow, in effect, is for HMRC to collect an estimate of the difference between the outside IR35 taxes already paid and the subsequent inside IR35 tax that is due. That will allow HMRC to collect roughly the right amount of tax for the engagement without tax being paid twice. It is proposed that the changes will come into effect for Income Tax and NICs assessed on or after 6 April 2024.
The wider impact of the changes
The new IR35 changes are relatively minor, particularly given that they only apply in instances where HMRC has successfully challenged an outside determination. However, the rule change will have a ripple effect and impact the use and engagement of off-payroll workers.
Effectively, the new offset rules mean that tax liabilities will be distributed more fairly and reduce the exposure to costs for end users who engage with off-payroll labour. There has been a trend where some organisations have been turning away from personal service company (PSC) workers. However, now employers can more confidently engage workers on that basis.
Some IR35 compliance checks are paused
As a result of these changes, HMRC has allowed some clients to pause compliance checks in instances where the new offset rules may apply. HMRC will consider a pause if the case meets certain conditions:
- The compliance check has reached a settlement;
- The taxpayer has acknowledged the error in applying the off-payroll working rules in writing;
- The liability (not including the new offset rules) and penalty have been agreed upon;
- The taxpayer has provided information to HMRC so it can calculate the offset.
Although taxpayers can pause the settlement until after the new rules come in, you should still make a payment on account as interest on the tax owing will continue to accrue.
Ongoing off-payroll compliance considerations
As well as the new IR35 changes, employers will have to maintain compliance with the ongoing off-payroll working rules. With that in mind, it pays to revisit your compliance processes.
Assess employment status for contractors hired directly
Organisations are still responsible for assessing employment status for tax regarding contractors hired directly (not via an intermediary such as a personal services company). Payments to contractors who you determine to be employees should be subject to PAYE and NICs. These employment status rules remain unchanged and will continue to pose a challenge for organisations engaging directly with contractors.
Umbrella companies may not be appropriate
A common response to the off-payroll working rules has been to hire all workers as employees or engage with contractors employed by umbrella companies. However, this may no longer be the most appropriate hiring model moving forward, and organisations should review their future plans for flexibly hiring workers.
You must consider your responsibility not to facilitate tax evasion under the corporate criminal offences legislation. If umbrella company arrangements are to continue, you must perform appropriate due diligence checks.
Status determinations are required
Some status determinations are still required when engaging with contractors using intermediaries. HMRC treats office holders (such as statutory directors or non-executive directors) as employees for tax purposes, even if engaged via an intermediary.
CIS rules must be applied
The off-payroll working rules take precedence over the Construction Industry Scheme (CIS). As of 6 April 2023, all organisations subject to CIS must ensure they apply the CIS rules.
Avoiding penalties: The importance of adherence to new and existing regulations
If your organisation meets the criteria to implement IR35 off-payroll working rules, engages contractors directly and is the end client of the services, you must:
- Review every agreement with a contractor to determine whether IR35 rules apply;
- Prepare a Status Determination Statement (SDS) for each contractor;
- Issue the SDS to your contractor;
- Establish a disagreement process for a contractor so they can challenge the SDS.
If you fail to comply with your IR35 obligations, it can lead to penalties and potential legal consequences. HMRC carries out compliance checks in the form of a letter to understand what processes you have to manage your employment status assessments. If HMRC is not satisfied with your response, it can conduct a full investigation and that can lead to penalties.
If the investigation finds you have made inaccurate determinations, it can issue financial penalties based on the reason for the error.
- 30% of the unpaid tax if the investigation finds you were ‘careless’ when determining the employment status of off-payroll workers but did not know you had made a mistake.
- 70% of the unpaid tax if the investigation finds you knew you had made a mistake in determining the status as inside IR35 but chose not to act.
- 100% of the unpaid tax if the investigation finds you actively tried to conceal the employment status of off-payroll workers to underpay tax.
As well as the financial cost of the penalty, the investigation can potentially span several years and bring substantial legal costs. There’s also the risk of reputation damage, with HMRC sometimes publishing the details of organisations that have made inaccurate determinations.
Simplifying compliance: Introducing our IR35 navigation tool
We know that off-payroll working can be confusing for an organisation, especially with the constantly changing IR35 rules. To make your situation easier, Moore Kingston Smith has designed a tool to clear up any confusion and set you on the right path.
Our off-payroll worker tool can help you understand:
- What the rules are;
- Whether the rules may apply to your organisation; and
- The steps your organisation should consider to comply with changes.
Understanding all these aspects can help to keep you fully compliant and minimise the risk of penalties.
Summary
After the ups and downs of the last couple of years, the good news for the majority of organisations is that it’s essentially business as usual. From April 2024, if you get an IR35 determination status wrong, the new off-payroll working rules will ensure you don’t face a disproportionately large tax bill.
How Moore Kingston Smith can help
Our IR35 and payroll specialists will assess your potential risks, develop a plan to manage contractor relationships in your business and ensure you comply with your obligations. Learn more about our payroll service or get in touch to discuss your requirements with our team.