Off Payroll (IR35) Offset Rules – Proposed changes for 2024

The off-payroll reforms to IR35 have had something of a tumultuous history. Words and phrases such as “controversial”, “delay”, “proposed reversal” and “reversal of the proposed reversal” could all be found a home in any summary overview of the legislation. With 2024 rapidly approaching, it’s now looking likely that there’ll be a new buzzword to throw into the mix – “offsets”.

Before we get too excited, however, this is not a wholesale change to off-payroll; think of it more as a relatively minor tweak. But it could have a very significant financial impact in certain situations. It’s also worth pointing out that the proposed changes still need to go through the proper legal process to make their way onto the next Finance Bill. However, it does seem this is likely to happen following a short 8-week consultation on the issue which was opened and closed earlier this year. In fact, HMRC are already speaking with stakeholders regarding the impact that the offset changes might have on their liabilities arising from HMRC reviews into their off-payroll response (an introduction of the offset changes in April 2024, as proposed, would see the offset adjustment apply retrospectively all the way back to 2017).

IR35 Offset – What is it and what’s being suggested?

In simple terms, they’re proposing to insert a ‘tax offset’ into the off-payroll rules to allow taxes paid by an outside of IR35 PSC to be taken into consideration in the scenario where HMRC challenges that outside status and subsequently requires the deemed employer to account for employed (inside IR35) levels of tax and NIC’s.

Under the current rules, there’s no offset, meaning that in these situations there’s essentially “double taxation” going on, with HMRC collecting outside of IR35 liabilities from the PSC whilst also recovering inside of IR35 taxes from the deemed employer, all for the same engagement!

What the offset would allow, in effect, is the collection of an estimate of the difference between the outside IR35 taxes already accounted for and the inside IR35 tax now deemed owing. This will allow for the collection of broadly the correct amount of taxation due for the engagement, rather than the current situation where there is either tax yield in excess of 100% of what is due, or alternatively, the PSC obtains a full refund on the outside IR35 taxes paid and then has a zero-tax liability itself.

Wider behavioural impact?

The offset issue with off-payroll only becomes real in a very specific situation; it only applies in the instance where HMRC successfully challenge an outside determination. However, the behavioural impact of this pending update should be more pervasive across the landscape of supply chains utilising contingent workers.

This offset tweak effectively means that tax liabilities will be more fairly shared through the supply chain, resulting in the client (or other deemed employer) no longer carrying a disproportionate tax burden in instances where the determination is overturned. This should result in a general reduction in fear levels associated with engaging PSC workers and should further support the already emerging trend where supply chains are beginning to turn away from their initial (fear-based) decisions to “ban” PSCs, and are instead now looking for ways to re-engage PSCs through well thought-out practices and procedures that can demonstrate reasonable care and a sophisticated understanding of their legal obligations.