After years of lobbying and confusion over double taxation, the long-awaited IR35 Offset legislation finally came into force on 6 April 2024. Its purpose is simple: to make things fairer and ensure that tax isn’t collected twice on the same income when HMRC overturns an engager’s Off-Payroll Working determination.

What brought about the IR35 Offset legislation? 

When the Off-Payroll Working Rules (the IR35 reforms) were introduced (2017 for the public sector and 2021 for the private sector), they shifted responsibility for determining IR35 status and paying the correct taxes.

Before these reforms, contractors working through limited companies determined their own IR35 status. The new rules made clients (or “engagers”) responsible for deciding whether a role is “inside” or “outside” IR35, and where inside, the fee payer/deemed employer (the agency if there is one, otherwise the client) is required to deduct PAYE and NICs from the contractor’s payments.

But there was a serious flaw: where engagers’ IR35 failings were being picked up during HMRC checks and HMRC later decided that a contractor had incorrectly been assessed as outside IR35, the client became liable for all the unpaid PAYE and NICs – even if the contractor had already paid tax on that same income through Corporation Tax, Income Tax, and dividends. This meant HMRC could effectively collect tax twice on the same income.

The IR35 Offset legislation (or “set-off” legislation), was introduced to fix this.

What does the IR35 Offset do?

The offset allows HMRC to take into account taxes the contractor has already paid when calculating the amount owed by the client or deemed employer arising from the misclassification of workers under the Off-Payroll Working rules.

It applies retrospectively to any engagements dating back to the introduction of the Off-Payroll Working rules but only for new cases, or those still open as 6th April 2024. Any organisations who have settled cases prior to this date cannot make use of the offset.

The offset mechanism brings long-overdue fairness to the system, finally protecting clients and agencies from unnecessary and unfair tax liabilities, a key deterrent to engaging contractors.

How does the IR35 Offset process work?

Once HMRC has determined that a role was inside IR35 and a tax liability exists, the offset can be applied if certain conditions are met:

1. Information submission:
   The client (or deemed employer) must provide HMRC with details to identify the contractor, including their name, National Insurance number, and company name.
2. Verification:
   HMRC then checks the contractor’s tax records to confirm whether tax has already been paid on the income from that engagement.
3. Calculation:
   HMRC calculates the amount to be offset using its “best estimate” based on available evidence. If the contractor can’t be identified or records can’t be matched, no offset will be given.
4. Direction notice:
   Where an offset is allowed, both the client/deemed employer and contractor receive a direction notice confirming the amount and tax years affected. The contractor must agree with the figures, and can appeal if they don’t.

What taxes can (and can’t) be offset?

The offset can include:

• Income Tax (salary and dividends)
• Corporation Tax
• NICs (Class 1 employee, 2 and 4 contributions)

It cannot include:

• Employer’s NICs (secondary Class 1)
• VAT
• Any tax paid on income unrelated to the engagement under review.

In short, the offset only applies to taxes already paid on the same income that’s now being treated as employment income.

Where an offset is applied, clients and fee payers still remain liable for the remaining tax, and penalties still apply if they’ve failed to take reasonable care.

Ensure you can use the IR35 offset if you need it!

If you engage contractors and fall within scope of the Off-Payroll Working rules, you may need to use the offset mechanism if you are ever found to have not made correct IR35 determinations or taken reasonable care. To ensure you can use it if you ever need to, you must:

• Maintain clear, detailed records of contractors, including their company details, NI numbers and IR35 status determinations.
• Keep copies of all Status Determination Statements (SDSs) and supporting evidence showing you took reasonable care.
• Seek assurances from your contractors that they keep their accounting records accurate and up to date.
• Act quickly if HMRC contacts you – providing incomplete or inaccurate data could prevent you from benefiting from the offset if you need it.

This could significantly reduce your liability in an HMRC review so record-keeping must be watertight.

For Agencies / Fee Payers:

Agencies often sit in the middle, paying contractors on behalf of clients and could therefore become deemed employers under the Off-Payroll Working rules. They should:

• Ensure worker record-keeping is adequate, consistent and accessible.
• Work with clients to ensure all SDSs and engagement details are shared and stored properly.
• Review processes regularly to confirm reasonable care obligations are being met by the engagers they are working with.

Finally – take steps to avoid ever needing it

The offset may not eliminate all liability, but it provides a safety net as long as the right information is readily available.

We hope you will never be in a position where you need to apply the offset, and as always, ensuring best practice around making accurate and reliable IR35 determinations and clear, defensible processes will help you avoid ever needing to use it. 

If you are unsure whether your Off-Payroll Working compliance is up to scratch, contact us today. 

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