Only a few days left for IR35 ‘double-taxed’ contractors to reclaim thousands from HMRC

Pleasingly, HMRC has found a solution to the issue of ‘double-taxation’ for engagers under the off-payroll working rules.

Less pleasingly, many contractors will have paid thousands too much in tax over the years for the very same reason – and April 5th 2024 is the deadline for many of them to claim it back, writes Nigel Nordone, head of tax at IR35 contract review firm Qdos.

Let me explain why.

The so-called ‘double-taxation’ of IR35 is just one more frustrating flaw in the much-disliked legislation, to be added to the long list of frictions that have plagued the rules since their inception in 2000.

What is IR35 'double-taxation'?

Where contractors have incorrectly operated outside IR35 and been issued a tax bill for doing so – whether in engagements pre-dating the April 2017/2021 reforms or with small businesses – HMRC doesn’t always offset the tax that has already been paid on the income.

This means the contractor’s earnings for that assignment may effectively be ‘double-taxed’.

While no doubt an irritation for contractors to deal with, the good news is that it’s possible to reclaim the tax you may have overpaid.

Where and when income is subject to 'double-taxation'

Before we explain how to claim back the tax, I’ll outline where and when this ‘double-taxation’ actually happens.

Limited company contractors may have been ‘double-taxed’ where they have incorrectly operated outside IR35 before the introduction of the off-payroll rules, or when engaged by a ‘small company’ since then.

If so, you’ll have received a tax bill from HMRC to settle the outstanding liability, which comprises income tax and national insurance due on the assignment fee. However, when calculating this bill, HMRC doesn’t automatically take into account taxes you have already paid. This includes corporation tax and dividend tax, but also income tax – illustrating just how rudimentary the tax office’s calculation is!

Didn’t the government announce a fix for IR35 ‘double-taxation’?

They did, and it applies from April 6th 2024.

Unfortunately, though, this change only applies to the businesses that have been overtaxed when settling IR35 liabilities – not contractors.

It’s a shame this is the case – not just because the narrow scope of the change excludes contractors, but because the consultation around it, and the change itself, were promising signs that HMRC recognised problematic elements of the off-payroll reforms – and a willingness to fix them.

How to reclaim overpaid taxes under IR35

If you’ve recently settled an IR35 liability and believe you have been overtaxed, you can submit what’s called an ‘overpayment relief claim’ to HMRC.

For these claims to be valid -- and here’s the crucial part if you paid any IR35 tax bill in 2019/20, HMRC must receive them within four years of the end of the relevant tax year. And April 5th 2024 is just days away!

So this four-year window means any tax liabilities under IR35 settled by PSCs within the last four years, up to the limit of 6th April 2020, may be eligible for reclaim, That’s the case even if the liability predates the time limit.

As you’ll know, it can take years for HMRC to conduct and complete an IR35 investigation. So, even if HMRC’s investigation began years ago, provided the tax bill was paid within the last four tax years, your claim may be valid.

To submit your overpayment relief claim, you need to write to HMRC today. In your correspondence, you’ll need to include some information about you and your limited company, as well as:

· More detail about the liability you were issued, including any reference numbers, and the tax years that the liability covered; and

· Detail about the taxes you paid during the period in question which should be included in the re-calculation of the liability.

If you paid your IR35 bill more than four years ago...

This could very well be the case for some readers of ContractorUK.

While there’s no guarantee that an overpayment claim will be accepted beyond four years, you have grounds to pursue it, with HMRC’s guidance stating:

“You can also accept a late claim, but not a late election, if all the income, profits or gains affected by the claim depended on the outcome of discussions between the person and HMRC which had started but were not complete before the time limit, and the delay in agreeing the figures was not substantially the fault of the person or their agent and could not have reasonably been avoided.”

Final thought

Given there may be thousands of pounds at stake, submitting a claim for overpayment of IR35 liabilities is absolutely worthwhile, even if having to get back what shouldn’t have been swallowed up by HMRC in the first place does seem to beggar belief!