IR35 offset mechanism to go ahead from 6th April

Buried in the small print of last week’s Autumn Statement was a reference to the IR35 Offset Mechanism, and confirmation that it is to go ahead from 6th April 2024. This is positive news for the contracting sector as until now an implementation date for this hadn’t been confirmed.

IR35 Offset Explained

Since April 2021 (2017 in the public sector), for contractors who work via a Personal Service Company (PSC), the decision on their employment status for tax has in most cases rested with the company hiring them. The hirer may end up with PAYE tax liability if HMRC look at an outside-IR35 decision and deem the contractor to be employed for tax purposes.

The new offset mechanism will allow HMRC to reduce the PAYE liability of a deemed employer to account for tax already paid by an individual and their Personal Service Company (PSC) where an error has been made in applying the IR35 off-payroll working rules. 

So, in cases where HMRC disagrees with a IR35 status determination, any corporation tax and income tax already paid by the PSC can be offset in calculating the PAYE liability – effectively preventing double taxation. 

The offset will apply to PAYE assessed from 6th April 2024 on deemed payments made on or after 6th April 2017. 

What this means for hirers, contractors and agencies

Under the off-payroll working rules as they stand today, when a contract has wrongly been classed as outside IR35 when it should have been inside IR35, HMRC will seek to recover the full arrears of PAYE taxes, even though a percentage of this has already been paid by the contractor and their PSC.

While it’s fixing an issue that has been unfair all along, and amounts to double taxation, the IR35 offset mechanism will no doubt be welcomed by the contracting supply chain. 

For hirers, the offset will reduce the financial risk of engaging PSC contractors to deliver outside IR35 contracts. It might even be enough for some end clients to re-think blanket bans on PSC contractors – opening up the market to more skilled resource.

If it does have this effect, it will give contractors more choice and control over how they provide their services. 

The offset mechanism also provides assurance for recruitment agencies, as in some cases they are at risk of tax liability under IR35 – notably where HMRC deems that a hirer has taken “reasonable care” in applying the off-payroll rules, but has incorrectly determined the IR35 status of some contracts. 

It also stands to reason that if hirers become more comfortable engaging PSC contractors this would give recruiters a bigger pool of talent to get contracts delivered. 

However, as with all things IR35, the proof of the pudding will be in the eating, and it is likely to be some time before the positive effects of the offset mechanism filter down.

Liquid Friday’s COO Joe Taffurelli commented:
“I am pleased that HMRC & Treasury have seen the light on this and have legislated accordingly. This is pragmatic measure and removes the risk of over taxation and unfair practices from the authorities. I am personally intrigued what the practical implications for those Government Departments and businesses already impacted by IR35 investigations will be”.

Help and further information

For information on the measures announced in the Autumn Statement, see our summary

For general help with IR35, head to our IR35 Hub 

For weekly updates to your inbox, subscribe to our newsletter