How Will the Offset Rule Affect Recruiters and Contractors?
Starting April 2024, a significant change to the off-payroll working rules (IR35) will be introduced. This new offset mechanism aims to prevent double taxation and make working with independent contractors more attractive for recruiters.
What Is IR35?
Since the IR35 rules were updated in 2017 and 2021, recruiters engaging off-payroll workers are responsible for determining their employment status for tax purposes and ensuring the correct tax and National Insurance Contributions (NICs) are paid to HMRC.
Why Is the Change Needed?
Before April 2024, if HMRC found a worker had been incorrectly classified as self-employed, the recruiter was liable for unpaid Income Tax and NICs. If the worker has already paid tax on the same income, this can lead to double taxation.
What Has Happened So Far?
In April 2023, the government consulted on a legislative change to allow HMRC to account for tax and NICs already paid by the worker against the recruiter’s PAYE liability. Following feedback, the government announced in the November 2023 Autumn Statement that this change would take effect from 6 April 2024.
How Will It Work?
From 6 April 2024, the deemed employer’s liability for Income Tax and NICs will be reduced by any amounts already paid by the worker or their intermediary. This offset will apply following an HMRC compliance check and will be based on HMRC’s estimate of the tax paid. To qualify, the worker or intermediary must have filed the relevant tax returns.
How Will It Affect Recruiters?
Recruiters with clear visibility of their contractor workforce can significantly reduce their tax liabilities in case of incorrect assessments. However, recruiters must provide HMRC with specific information about workers and intermediaries, such as:
- The worker’s full name or National Insurance Number (NINO)
- The intermediary’s or partnership’s name
- The intermediary’s Company Reference Number (CRN) or VAT Registration Number (VRN), where applicable
Failure to provide this information may result in no offset being granted, as HMRC needs to verify that the correct tax has been paid.
How Will It Affect Contractors?
Contractors will see minimal changes. They cannot claim repayments for tax paid on impacted contracts but can appeal HMRC’s estimates if they believe they are incorrect. Contractors will continue to pay the same tax as if the contract were outside IR35.
Notably, no offset will be given for the deemed employer’s Class 1 secondary NICs liability, although any such NICs paid by the worker’s PSC may be eligible for a repayment.
Summary
These changes are designed to make compliance with IR35 fairer and less financially burdensome for recruiters while maintaining stability for contractors. For recruiters, staying informed and ensuring proper documentation will be key to leveraging the benefits of the new offset rule.
