An overview of the IR35 offset changes

From 6 April 2024, a proposed new “set-off” mechanism should prevent end clients from overpaying tax when HMRC decides there has been a mistake in applying the off-payroll working rules (IR35). In this blog, we explain what’s changing and what the IR35 offset means for end clients and contractors.

What’s the issue?

Currently, when HMRC find that a client has made a mistake in applying the off-payroll working rules (i.e. classing an individual outside IR35 when they should be inside IR35), the end client is then liable to pay the Income Tax and National Insurance contributions as if the individual was a worker.
At present, there is no way for the end client to offset the tax already paid by the contractor, leading to a double payment of tax.

What is the IR35 Offset Mechanism?

From 6 April 2024, HMRC will be able to take into account, or ‘set-off’, the taxes the worker or their intermediary have already paid against the amount the deemed employer owes.
The end client will be able to offset corporation tax, income tax and National Insurance contributions paid by the contractor’s limited company from the off-payroll working engage
N.B. This does not extend to Class 1 Secondary (Employer’s) National Insurance.
The offset will apply to PAYE assessed from 6th April 2024 on deemed payments made on or after 6th April 2017.

What does this mean for contractors and end clients?

The IR35 offset mechanism will be welcomed by the contracting industry, fixing the unfair issue of double taxation.

  • For hiring companies, the offset mechanism could significantly reduce their financial risks when engaging PSCs for outside IR35 contracts. This could prompt a rethink of blanket bans on outside IR35 contracts, creating more outside IR35 roles for highly skilled self-employed workers.
  • For contractors, on the whole, this is good news. Hopefully, we’ll see an uptick in outside IR35 contracts, giving contractors more control over how they provide their services and who they work for.