IR35 offset issue emerges as frontrunner for Spring Budget 2023

The so-called ‘IR35 offset issue’ has been catapulted to the top of Spring Budget 2023’s sensible contents list.

A fix for the issue, which results in HMRC’s off-payroll rules taxing the same income twice, was mooted in a Treasury report in late 2022.

Back then, in response to criticisms that it overly collects from the same IR35 non-compliant engagement, HMRC spoke of a potential “legislative solution.”

'Revised IR35 legislation does not provide a set-off'

To a critical National Audit Office and Public Accounts Committee at the time, HMRC also said that it had started a “process” to “reduce the circumstances” where it collects taxes twice.

But going further, HMRC vowed to see if the statute book could be altered, given that the revised IR35 legislation “does not provide for a set-off” for engagers’ or PSCs’ taxes, it said.

This week, status expert Kate Cottrell categorised the IR35 offset issue as ‘something that has more of a chance of being realised’ on March 15th.

And yesterday, in a Spring Budget call to the chancellor, Qdos put the IR35 offset issue at the very top of a list of four things it wants Mr Hunt to address on Wednesday.

'One of the most illogical and unjust aspects of the off-payroll rules'

The IR35 contract review firm’s boss Seb Maley explained its decision to ContractorUK.

“It’s up there as one of the most illogical and unjust aspects of the off-payroll working rules – and something that could be easily fixed [at] Spring Budget,” Mr Maley said yesterday, referring to the offset issue.

“[We] have been stressing the point for years. We made it clear that the government must address the issue, in various consultation responses, but [so far] to no avail.”

'Simply isn't right for HMRC to net more tax than it should'

Markel, a tax advisory, will offer an overview of how such ‘double taxation’ (as Qdos described it), has until now applied, in an article exclusively on ContractorUK this Friday.

“As HMRC ramps up its compliance activity, and more businesses are subject to IR35 investigations and potential tax bills, this issue of double-taxation becomes an even bigger problem,” said Qdos’s CEO Mr Maley.

“Ultimately, it results in HMRC netting more tax than it should, which simply isn’t right.”

'HMRC still working to resolve the situation'

However speaking to ContractorUK, a spokesperson for HMRC appeared to blamed end-users, while indicating that the department's work to fix the offset issue is yet to conclude.

The HMRC spokesperson said this morning: "We are working very closely with stakeholders to resolve this situation, where overpayments of tax may arise because an organisation incorrectly assesses a contractor as self-employed for off-payroll working purposes.”

IR35 reform being U-turned at Spring Budget 2023 was all but ruled out last week, in favour of the contractor sector likely having to ‘work with what we’ve got’ instead.

'Don't moan'

Online, a limited company contractor in the tech sector signalled that not pressing policymakers on IR35 is about the worst sort of inaction there is.

“Don't moan about how contractors are treated, then just bend over and take what the current chancellor [offers while] you're forced inside IR35 and become an employee for tax purposes only.”

A project manager whose LinkedIn specifies ‘outside IR35’ opportunities only, the contractor added: “Hunt, and his predecessors Sunak and Javid have [caused ripples from] IR35 [reform] in almost every sector…[and then he] slashed] your tax-free dividend allowance”.

'Nothing in 17 years of contracting as destructive as IR35 changes'

Another contractor believes that reinstating IR35 reform without any changes has caused unprecedented, historical damage.

“I have been contracting for over 17 years and have never seen anything so destructive to impact businesses and people’s lives as much as the [central tenet of reform to] IR35 which sees end-clients determine the IR35 status of a contract.”

Sounding aware Wednesday could offer a reprieve, including if the IR35 offset issue is addressed, the contract Azure Architect also said: “If the government truly cares about avoiding a recession, then they need to be doing everything they can to drive innovation, and productivity, especially in the tech sector.

“What they are doing with this [reformed IR35 legislation], is stifling it. And causing a mass exodus of contractors from the market.”

'Hunt is a slave to Treasury groupthink'

The Association of Independent Professionals and the Self-Employed (IPSE) was originally set up with the sole objective of convincing the government to abolish IR35.

But IPSE’s Andy Chamberlain has spoken of “next to no chance” that Mr Hunt will row back on the revised framework which he reinstated just four months ago.

Perhaps IPSE has factored in warnings from one of the chancellor’s Tory colleagues Sir John Redwood MP, who in January charged Mr Hunt with being “a slave to Treasury groupthink.”

The association has the modest hope of the chancellor acting on the VAT threshold – a move that former Tory party chairman Brandon Lewis has endorsed, suspiciously close to the March 15th statement.

'Pro-growth Budget needed'

“IPSE would like to see a pro-business, pro-growth Budget. A good place to start would be the raising of the VAT threshold,” Mr Chamberlain yesterday told ContractorUK.

“And [we’d like to see] something to ensure that the UK’s smallest businesses will be carved out completely from the impending corporation tax hikes.”

Echoing the need for action, at least on VAT, is entrepreneur Luke Forsythe, who took to LinkedIn to condemn the £85,000 threshold as a disincentive to growth.

The chain of events set off as a direct result of registering for VAT has caused our profits to reduce to ~35%,” Forsythe began.

“At the exact time we should be scaling -- so we can contribute in a meaningful way to the economy -- we are having to think about how to survive.

“Tax in this country kills entrepreneurship and productivity. It kills early-stage companies. We need massive reform. Absolute growth-crushing insanity. No wonder productivity is so low.”

'Deeply flawed'

If it is insane rules that are to be eliminated at Spring Budget, then Qdos says IR35 must be the strongest candidate.

“If the government insists on keeping these rules, then the key issues which plague the deeply flawed IR35 legislation must be addressed,” says Mr Maley.

“The double-taxation of IR35 is immoral. If a business is handed a tax bill for non-compliance, HMRC ignores that tax has already been paid under the engagement by the contractor – it means HMRC nets much more than it should.”

'Hunt not knowing anything about the Loan Charge'

Qdos also takes issue with the Status Determination Challenge process, as contractors find it “incredibly difficult to challenge an incorrect IR35 status decision made by their client” who is “under no obligation to take this appeal seriously.”

Meanwhile, with the loan charge now linked to the suicides of ten taxpayers, there is no other HMRC policy which many in the contractor sector say Mr Hunt must take seriously, echoing the concerns of hundreds of parliamentarians.

But in the days following the chancellor being accused of Treasury groupthink, one contractor reflected ahead of the Budget, a week today: “I’d put money on Jeremy Hunt not knowing anything about the loan charge bar a one-pager of lies [he gets provided by officials as a brief].”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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