As the IR35 offset is almost here, can off-payroll contractors still use a limited company?

The IR35 offset is coming and will be introduced on April 6th 2024, writes Danny Batey, senior consultant at Markel Tax. So it’s worth asking before this coming Saturday, what does the “set-off” mean for contractors and what about related outside/inside IR35 scenarios under a client SDS?

IR35: How double-taxation currently ends up being levied by HMRC

The offset provisions which come into play in four days’ time are geared specifically to benefit ‘fee-payers’ in the event that an ‘outside’ determination is overturned by HMRC. In preparation for this, HMRC has published guidance at ESM10038.

Today, if HMRC concludes that an engagement should have been treated as employment, the fee-payer will face a PAYE liability for the income tax and NICs that should have been paid.

This liability will not take into account any taxes that the contractor would have paid in the normal running of their limited company. These taxes may include corporation tax on any company profits from the engagement, income tax paid on dividends, other income tax, and NICs paid on payments made to the individual.

Currently, the contractor is entitled to claim these taxes back while the fee-payer foots the entirety of the PAYE liability. However, if the contractor does not claim back these taxes, and the fee-payer also pays the liability in full to HMRC, there has been an overpayment of tax.

How the April 6th 2024 set-off will end double-taxation under IR35 - and who benefits

Effective from 06.04.24, the IR35 offset means that HMRC is able to reduce the liability of the fee-payer by the amount of tax already paid, or assessed by the contractor relating to the engagement in question.

Be aware, this mechanism will prevent the contractor from being able to claim back any taxes that are used in the offset. Yet as a contractor, you won’t be required to do anything; the fee-payer or client should already have all the necessary information HMRC will ask for.

Of course, the amount of tax that is available for the offset will vary – potentially quite drastically – as everyone draws money from their business in a different way. However, this is good news for fee-payers and could potentially encourage more companies to engage with the legislation.

Six off-payroll FAQs, as the April 6th IR35 set-off is upon UK contracting...

Let’s now turn to some related factors; some Frequently Asked Questions, if you will, related to the April 6th set-off.

1. Pre and post-April 6th 2024, why does an erroneous ‘inside IR35’ determination not carry any threat of HMRC penalty?

Wrongly deeming someone ‘inside IR35’ is not considered tax avoidance.

HMRC (and HM Treasury) are not worse off where PAYE is deducted from the contractor’s income.

Though, yes, arguably the legislation has been misapplied, there is no tax loss and therefore penalties from HMRC do not apply (as they can do where an outside IR35 determination has been wrongly made).

2. What should a client Status Determination Statement contain?

Unfortunately, the OPW legislation doesn’t instruct us what an SDS should look like.

HMRC guidance tells us what they would expect to see as an absolute minimum in an SDS.

This includes:

• Clear communication of whether the engagement falls inside/outside of the off-payroll working (OPW) legislation. This involves considering whether the individual is an ‘office-holder.’
• Reasoning for the conclusion that the decision-maker has come to by applying usual status tests. There should also be a ‘disagreement process’ outlined.

That’s all HMRC stipulates regarding the content of the SDS.

It should be noted that the decision-maker must also take “reasonable care” when determining IR35 status -- though this is an ambiguous area as “reasonable care” will look different for different decision-makers and most contractors will not be privy to the process which leads to the creation of the SDS. That said, we expect that both the contract and the working practices to be considered.

3. My client used HMRC’s tool for IR35 status – CEST – to inform the SDS. Is this ok?

In a word, yes.

HMRC has stated that CEST output can be used as a valid SDS provided it meets the criteria outlined in question 2, above, and that all relevant HMRC guidance has been followed by the CEST user.

4. What is an outsourced provider and what does this mean for my engagement?

An outsourced provider (sometimes called ‘managed services provider’) is a business that is engaged to provide a specific service to a client. This could be anything from an outsourced IT department to a provider of warehousing and goods processing services.

An outsourced provider (OP) is distinctly different from a labour provider or an employment business in that the OP is responsible for providing services - not individuals. This changes the dynamic of the relationships between the entities in the chain.

An employment business/labour provider sits in the chain like this:

Client => Employment Business => Contractor

The Client here is the end-client for the purposes of the OPW legislation, and therefore the decision-maker. The Employment Business is the fee-payer, which as we know, means it bears the tax liabilities (should there be any).

An OP seemingly sits in the same spot as the Employment Business.

However for the purposes of the OPW legislation (found at Chapter 10 ITEPA), they become the end-client. If the OP company is a large/medium-sized entity, they will have to consider the OPW rules and produce an SDS.

If, on the other hand,  the outsourced provider company is a ‘small company’, they will be exempt from Chapter 10, and the contractor will be responsible for (and liable for) IR35.

It is important for contractors to be aware of this distinction, as it could mean they will once again become responsible for their IR35 status. The OP has a requirement under the legislation to confirm its size -- if requested. 

5. I don’t agree with the SDS – should I get my contract reviewed?

This is entirely up to you.

If you are working under OPW rules then the end-client is responsible for making sure the IR35 status of the engagement is correct.

You have to remember that their decision is final -- even (unfortunately) if you believe it to be flawed. It is possible that you get your contract reviewed; then write an appeal letter in line with the client-led disagreement process, but the client will not change their determination.

In our experience, most end-clients are reluctant to make changes once they have determined the IR35 status of a contractor engagement. While they are required by law to consider any appeals, they are under no obligation to change their mind.

6. Can my recruitment agency appeal the client's SDS on my behalf?

An agency can only appeal an ‘inside IR35’ SDS if they are a ‘deemed employer’.

This means that, in the contractual chain, the agency has to sit right above the PSC and the SDS has to determine the engagement to be ‘inside IR35.’

Be aware, where an SDS gives an outside determination, the agency above the PSC will not be a deemed employer and as such has no right of appeal.