IR35 has been a thorn in the side of transformation, change and IT contractors and teams across the UK since the amendments that were brought in 2017.

With further administrative steps put in place for those roles inside IR35 and the risk of “double taxation” for any that sat outside of it, the legislation drastically shook up the contract world and led to a huge shift in how companies and contractors approached opportunities.

Thankfully, HMRC has announced a new wave of reforms, which is set to alter the way that IR35 operates, especially for those roles that sit outside of it. The changes are tipped to turn the UK’s contract space on its head and are coinciding with April’s budget.

The changes appear to be well received by contractors and companies, and some experts are even predicting that the updates will see roles outside of IR35 dominating the space by the end of 2024.

How roles outside of IR35 used to work

To best understand how the new changes will affect contractors and clients we’ll have to cover how roles outside of IR35 used to work.

For this example, we’ll look at a role which starts outside of IR35 but is then brought back in by HMRC and subject to what many term “double taxation.”

• A contractor is approached outside of IR35 – the client determines whether the contractor sits within IR35 or outside when they bring them on.
• HMRC investigates the client – as part of compliance activity, HMRC opens an investigation into the client to scrutinise the accuracy of the IR35 determination.
• HMRC finds the client has incorrectly determined the contractor – in this instance, HMRC finds that the contractor was incorrectly placed outside of IR35. This means the contractor’s fee should’ve been subject to PAYE deductions, Employer and Employee National Insurance Contributions.
• The client is issued a tax bill for missing payments – In this situation, the client is the fee-payer, so they are responsible for any PAYE liability and are required to pay it as soon as possible.
• This bill is not subject to any deductions from tax already 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 Employee NICs. The client, therefore, pays additional Employers NICs and, if they qualify, the Apprenticeship Levy.

This process and the threat of “double taxation” have been the norm since 2017 and have led to many organisations enforcing blanket bans for roles outside of IR35 to avoid the potential financial bite that they risk incurring. This led to difficulties for both contractors and companies within the contract space and saw a huge shift towards roles inside IR35. Thankfully, with the coming changes, these risks for roles outside of IR35 will be less prevalent, which could see the space shift away from roles inside of the legislation.

How IR35 is changing

Under the new changes, which will officially be in place on April 6^th, 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 rather than paying the full tax amount twice, some deductions will be made when a role moves from outside to inside IR35, saving companies and contractors headaches and, in some cases, a substantial amount of money.

HMRC will take the following into consideration when making deductions:

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

However, Employer NICs and the Apprenticeship Levy won’t be taken into consideration, so there is still a chance that companies pay these twice.

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 any liabilities that have been settled, these new rules won’t apply, and you won’t be able to claim back any “double taxation” payments.

These changes have been a long time coming and allow for companies to consider multiple avenues when filling roles.

What do the changes mean for the contract space?

These changes, while fairly minor, could drastically change the current landscape of the UK contract space. With the risk around roles that sit outside of IR35 being curbed, those in hiring positions will be evaluating their approaches. This is especially the case for those who have been enforcing blanket bans.

Many believe that these changes will tip the scales in favour of roles outside of IR35, with some even suggesting that by the end of 2024, two-thirds of contract roles in the UK may sit outside rather than inside IR35. It may even become difficult for organisations to source contractors who sit within IR35 if contractors no longer deem it necessary to offer their skills for IR35 roles.

HR teams will have to rethink their current processes for contract roles to see if moving away from inside IR35 offers a greater administrative and economic outcome for them.

Whether these changes will have an immediate impact is yet to be seen, but it is certainly something that those within the transformation, change and IT spaces should be aware of.

If you’re looking for advice on contract approaches and hiring strategies that take advantage of these IR35 changes and want to speak to an expert who can help you navigate them, click here or send us an email at info@deltragroup.com.