TaxApr 28 2023

HMRC considers 'game changing' IR35 tax reform

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HMRC considers 'game changing' IR35 tax reform

Businesses may be allowed to offset tax already paid if HM Revenue and Customs deems them liable for additional tax under the off-payroll working rules.

In a consultation, published yesterday (April 27), HMRC has asked for industry feedback on a raft of changes to the IR35 tax rules.

One change is whether legislation should be changed to allow HMRC to offset taxes already paid by a worker or their personal services company in the event that a directly engaged worker has been incorrectly classed as a self-employed trader.

Currently, HMRC cannot offset taxes already paid in this instance, resulting in businesses being taxed twice.

“The current process results in the deemed employer bearing the full cost of the tax and national insurance contributions liability,” HMRC said.

IR35 was first introduced in 2000, and set out that where an individual is working like an employee, they should pay tax like an employee, regardless of whether they were working through their own intermediary.

The rules aimed to ensure fairness in the tax system by addressing the issue of people working like employees but through an intermediary simply to avoid paying employment taxes.

When the rules were introduced, it was the worker’s responsibility to decide whether they were working like an employee, however HMRC said this led to “increasing and widespread” non-compliance with these rules.

The government therefore reformed IR35 in 2017 for public companies and 2021 for medium and large private companies.

The reforms places the responsibility for determining the worker’s status on the companies engaging them.

If a company is found to have made an error in determining this status, the employer (whether the company or an agency) becomes liable for the income tax and national insurance contributions that should have been deducted from the fee paid to the off-payroll worker had they been correctly identified as an employee for tax purposes.

The consultation runs until June 8.

Chief executive of Qdos, Seb Maley, said the changes were potentially “game changing”.

“The double-taxation of IR35 under the off-payroll rules is a massive problem…it means HMRC collects much more than it should. It’s morally wrong.”

He added that although a consultation marks progress, in theory its an issue that should be resolved relatively easily.

“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.”

There have been a number of high-profile IR35 cases that have gone to court recently.

Eamonn Holmes lost his appeal against HMRC, days after former footballer and TV pundit Gary Lineker won his case against HMRC, after the tax authority accused him of underpaying nearly £5mn in tax. 

In January this year Sky Sports pundit Stuart Barnes won an IR35 case, with a judge ruling that he was not liable for a £700,000 tax bill, and last year Radio 5 Live presented Adrian Chiles won a seven-year long tax liability case concerning the payment of £1.7mn in tax.

This was preceded by a number of losses, including fellow former professional rugby player, Michael Lynagh, who had his application for an appeal rejected in December last year, leaving him with a £230,000 tax bill for breaching IR35 rules.

Earlier in 2022, Sky Sports presenter Alan Parry also lost his appeal against HMRC, leaving him with a £356,000 tax bill.