Today, more than two million UK freelancers, contractors, interims and consultants choose to be their own bosses and self-employed. They underpin the UK economy, offering experience, expertise and knowledge to businesses that reap the benefits without committing to the ongoing costs of full-time hiring, a benefit for any HR director juggling tight budgets. Freelancers provide a low-risk way to access skills at short notice and on-demand, to help complete important projects.
However, HR directors involved in hiring contingent workers have been instructed, in some cases, not to take on limited company-based freelancers since the roll-out of the off-payroll legislation into the public sector in 2017 and the private sector in 2021. The new rules meant that firms, as hirers, became responsible for assessing the employment status of those temporary workers. Instead, firms took a risk-averse approach. Sometimes contractors were blanket-banned, or firms insisted they work as temporary PAYE staff. Central to that reluctance was a financially punitive mistake in the legislation that led to double taxation.
That error has now been fixed and became law when the Finance Bill attained royal assent on 22 February. The fix, which is due to take effect from 6 April 2024, should see HR directors returning to freelancers for the professional help they need.
Read more: Outside-IR35 contractor pursued by HMRC
What was the flaw?
The removal of the double taxation issue in the off-payroll IR35 legislation has been much anticipated by hiring firms, which had previously faced a disproportionate risk when engaging limited company contractors. Since 2017, companies have faced having to pay quadruple the perceived loss of tax where they'd incorrectly classified the IR35 tax status of contractors. The unwarranted deterrent had led some to implement blanket bans on hiring contractors, limiting their hiring options.
The fix effectively reduces the tax threat for firms by 75% and achieves what the legislation had initially intended – a fair sharing of the tax burden between employers and contractors.
Read more: HMRC updates CEST IR35 tool
What has changed?
Under the amended rules, any taxes already paid by the contractor's company will not be paid again. This ensures fairness and brings much-needed predictability to the tax liabilities associated with contractor engagements.
For most earnings levels, the additional tax burden for firms will range from 12.5% to 15% of the contractor's earnings. Moreover, the fix reduces the need for protracted and expensive litigation between firms and HMRC because the parties can agree on settlement figures with the automatic offset available.
And what now?
As HR directors and firms learn of this simple change, they may revisit their blanket ban policies on hiring limited company contractors, recognising that the reduced tax risk and increased clarity have removed a significant barrier.
For most firms, it will be "business as usual," but with the assurance that any mistakes in IR35 assessments will no longer result in disproportionate and unfair tax liabilities. The path for HR to engage a flexible and skilled workforce has become less daunting and easier to navigate, paving the way for a more dynamic and adaptable business landscape.
Dave Chaplin is CEO of the IR35 compliance firm, IR35 Shield
