Is the IR35 offset on off-payroll working benefitting contractors?

At the start of this new tax year, 2024-25 on April 6th, a long-awaited legislative fix for a well-known issue relating to IR35 and the off-payroll rules finally came into play.

It was the introduction of an offset mechanism, and it means that businesses engaging contractors now face a lower financial risk of getting an IR35 status decision wrong. The IR35 offset, then, is a very welcome development indeed, writes Seb Maley, CEO of IR35 contract review firm Qdos.

‘Double taxation’

The issue which the OPW offset addresses – colloquially known as ‘double taxation’– was one of many flaws that arose from HMRC’s rushed implementation of the IR35 reforms, and one which caused businesses considerable concern.

As a result, a lot was made about the Revenue’s decision to fix this problem – and rightly so. It was a significant development, despite being a relatively simple fix. Of course, the resolution was only so widely welcomed precisely because it solved a problem that never should have existed in the first place!

What IR35 ‘double taxation’ meant in practice

A quick reminder of the issue of IR35 double taxation for anyone who needs it.

In simple terms, businesses faced greater financial risk when incorrectly engaging a limited company contractor outside the clutches of IR35.

For example, Contractor ‘A’ is engaged outside of IR35 by Client ‘X’ for a project. On completion, ‘A’ receives their fee and pays the taxes due.

However, imagine HMRC believes the IR35 status determination was incorrect, and issues X with a bill for the tax liability associated with the engagement. Crucially, HMRC hasn’t accounted for the taxes already paid by A, the contractor, – leaving X, the client, with an inflated bill.

The prospect of ending up in such a predicament put many businesses off the idea of engaging contractors ‘outside’ IR35, instead adopting a more risk-averse approach.

A more proportionate punishment

An obvious issue, then, and one which has been belatedly resolved by the April 6th 2024 offset.

HMRC can now account for any taxes paid by a contractor before issuing businesses with a liability bill and, in the event of an incorrect status decision, there is now a more proportionate liability.

Naturally, this is good news for contractors, too; something that has been hard to come by in recent years!

Having been formally in effect now for a few months – and previously trialled by HMRC for a little over six months before its official launch – we’ve had a chance to see the off-set mechanism in action.

Some progress has been made…

First – the good news. Businesses are already beginning to rethink their approach to IR35 and are more pragmatic about engaging contractors outside IR35.

This is something our IR35 contract review firm has seen firsthand.

And the rethink is especially the case for businesses engaging contractors on a large scale. Clients engaging hundreds – or even thousands – of contractors have seen the theoretical financial risks of incorrect engagements drop considerably.

As a result, confidence is on the up. End-clients are beginning to soften their stance when engaging contractors. What does that mean in practice? More opportunities outside IR35 for contractors, in theory.

But contractors still face a challenging environment

That’s not to say that everything is now right in the IR35 world. There is still much work to be done, both in terms of engagement and education for businesses on compliantly managing the off-payroll rules and in lobbying for change.

There’s no denying, after all, that many businesses remain risk-averse in their approach to engagements. Contractors still face inside IR35 placements irrespective of their true IR35 status.

Such an approach is needless, with or without the offset mechanism. The off-payroll rules can be managed compliantly, with the right approach.

Increased compliance activity on the horizon?

It’s still early days where the offset mechanism is concerned, but we are seeing signs of progress.

While its introduction is a positive development, and materially reduces the financial risk for businesses engaging contractors, it doesn’t (yet) represent a definitive shift in policy.

The Labour government appears to remain committed to the off-payroll rules, and the new chancellor, Rachel Reeves, recently indicated that HMRC will benefit from additional funding for compliance activity. I’ve no doubt IR35 will be one area under increased scrutiny.

However, even against this backdrop, businesses can – and should – be confident in engaging contractors outside IR35, especially with an offset mechanism in place to make the engagement less risky and less taxing.