This legislation, put into place in 2017 for the public sector and 2021 for the private sector, meant that employers have had to make tax repayments of up to four times the amount when they have incorrectly classified the tax status of self-employed workers.
The legislation faced backlash as it deterred some employers from working with freelancers. In some cases, employers implemented a blanket ban on contractors.
A January 2024 survey by flexible worker insurer Qdos found that 49% of independent workers wanted the government to scrap IR35.
The same survey found that 49% of contractors said that IR35 is the main reason for poor business performance in 2023.
The current IR35 legislation will be overridden by the Finance Bill that comes into effect tomorrow (6 April 2024).
Read more: IR35 legislation change will help HR hire much-needed talent
Seb Maley, CEO of Qdos, explained that the changes will mean that businesses will no longer be double taxed for wrongly classifying contractors under IR35.
Speaking to HR magazine, he said: “In simple terms, HMRC will offset tax already paid by a contractor if and when it issues a tax bill to a business for non-compliance.
“Effectively, this means businesses will no longer be double taxed, as it’s referred to.”
Dave Chaplin, CEO at tax compliance firm IR35 Shield, added that the changes would help employers avoid employment tribunals for wrongly classifying employees.
He said: “Because the tax offsets are now automatically baked into the legislation, where firms have made mistakes, settlements will be far quicker and easier to resolve and avoid the need for firms to go to expensive and time-consuming tax tribunals.”
The changes will have a positive impact on HR, Maley added.
He continued: “While relatively complex, the long and short of it is that this is very good news for businesses engaging contractors – and in turn, HR departments that are often tasked with managing IR35 processes.
“The perceived financial risk of engaging contractors has reduced, typically by thousands for every contractor engaged.”
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Speaking to HR magazine, Chaplin noted that the changes will give HR leaders more confidence when hiring freelancers.
He said: “With the offsets fix to the IR35 legislation taking effect from 6 April, HR teams responsible for hiring freelancers can be assured that they will no longer face disproportionate tax bills.
“Since 2017 the potential for firms to be hit with a bill four times the actual amount of underpaid tax was punishing and probably led to many firms taking a blanket ban approach to hiring freelancers.
“We now have much needed certainty and clarity and firms can once again hire with confidence and without the fear of financial penalties.
“The fix is welcome news for the flexible economy, freelancers and the firms that hire them.”
