Are you owed an IR35 tax refund?

In this article, we’re going to look at whether you may be owed an IR35 tax refund. It’s quite a complex subject, so let’s start by taking a quick look at how IR35 works.

Over the last few years, the rules about off-payroll working (IR35) have changed. The impetus behind the changes was concern that contractors incorrectly used personal service companies to reduce their tax bills. The new rules introduced a number of tests to determine whether a person was a genuine contractor or a ‘disguised employee’. HMRC now has an online tool that lets you check whether you are inside or outside IR35 for tax purposes.

The changes to IR35

Up until 2017, it was up to individual employees to determine their own IR35 status. From that year, it became the responsibility of hiring organisations in the public sector. From 2021, it also became the responsibility of large- or medium-sized hiring organisations in the private sector.

Liability for incorrectly paid tax

Between April and June 2023, HMRC ran a consultation called Off-payroll working (IR35) – calculation of PAYE liability in cases of non-compliance. This was designed to tackle the issue of taxation when a worker/intermediary is wrongly deemed to be outside IR35. It’s worth quoting HMRC to get a full understanding of the problem:

If the client is found by HMRC to have made errors in determining the employment status of its off-payroll workers, the deemed employer (which could be the client or an agency further down the labour supply chain) becomes liable for Income Tax and National Insurance contributions (NICs) that should have been deducted from the fee paid to the off-payroll worker had the correct status determination been made. In this situation, HMRC may end up collecting more tax than is due because the worker and their intermediary may have already paid tax and NICs on the same income in the belief that they were outside the rules.

As a result of the consultation, the IR35 taxation rules will change. From 6th April 2024, a business caught by the IR35 rules as a deemed employer will be able to offset the tax and NI already suffered by the worker’s intermediary (e.g. personal services company) when reaching a settlement with HMRC.

Importantly, any agreed settlements before 6th April 2024 will result in the deemed employer picking up the tab in respect of themselves and the worker/intermediary. In other words the worker/intermediary can reclaim the tax and NI they paid in respect of corporation tax, employment taxes and dividend tax as relates to the relevant income.

An IR35 tax refund isn’t automatic

HMRC has set aside almost £88 million for IR35 tax refunds. But to get an IR35 tax refund under the current rules, you need to be proactive. A Freedom of Information request submitted in March 2023 revealed that HMRC hadn’t notified a single worker/intermediary of their right to an IR35 tax refund. Their excuse? They claimed they were struggling to identify these people!

How to get an IR35 tax refund

If you are a public sector worker/intermediary, you may be able to claim an IR35 tax refund for any period going back to 6th April 2017. If you’re in the private sector, you may be able to claim from 6th April 2021. To get help with understanding whether you’re due an IR35 tax refund, or to get help with claiming one, talk to a member of our friendly accountancy team today.