In recent articles by ft.com and contractorweekly.com, it has come to light that HMRC has acknowledged that contractors could be entitled to reclaim tax if their end-client has made a wrong IR35 determination (1).
After a 12-month delay due to the Coronavirus pandemic, IR35 was finally rolled out to the private sector on 6 April 2021, changing the responsibility for status determination from that of the contractor to the end-client, provided they are a medium or large business.
The legislation change has put a potentially massive financial burden on medium and large businesses and seen many contractors have their contractual engagements terminated as result, as companies endeavour to control rising costs.
The legislation has also seen many organisations operate ‘blanket’ IR35 status determinations, which can in some instances have ramifications for the hiring company.
Since the private sector reform of April 2021, businesses found to have incorrectly assessed a contractor as outside IR35 could end up paying a large tax bill. This would include PAYE and National Insurance Contributions (NICs) for that contract.
What has also come to light is that HMRC states that it does not consider any tax that has already been paid, citing that offsetting was not allowed within the current legislation (2). A point we focused on in our recent article ‘Investigation into the IR35 reforms launched by the National Audit Office (NAO)’.
This means that too much tax will be collected in total and suggests that the contractor could reclaim tax he/she has paid. This means that income from that engagement is effectively treated as tax-free earnings for the individual. But what happens if the contractor does not reclaim the tax they may be due? Does HMRC keep it?
Andy Chamberlain, director of policy at IPSE highlighted, “It’s a ludicrous anomaly that highlights the absurdity of the IR35 changes. If this issue cannot be resolved, the reforms as a whole should be reconsidered.
“HMRC must ensure not only that it collects the correct amount of tax, but that it is collected from the correct taxpayer.”
Going forward, this could present a difficult administrative situation for HMRC as they will collect more tax than is owed, then face many contractors reclaiming tax they have already paid to the treasury.