Tax Implications for Contractors and Hirers: Inside vs. Outside IR35

The recent introduction of HMRC's tax offset has brought about significant changes in the landscape of off-payroll working arrangements. This new provision allows for the offsetting of income tax, corporation tax, or dividend tax paid by a limited company against PAYE and NICs due, in cases where HMRC successfully challenges an outside IR35 determination.

For contractors working through their own limited companies, this development has far-reaching implications. In the event of an HMRC challenge, the tax burden on the fee payer in the chain, whether it be a recruitment agency or the end client (hirer), is considerably reduced. The offset mechanism ensures that any taxes already paid by the contractor's limited company are taken into account, thereby mitigating the financial impact on the fee payer.

Interestingly, this change has also prompted hirers to reconsider their approach to engaging contractors. Some hirers have been paying significantly higher rates, to the tune of £15 - £20 per hour, for contractors deemed 'inside IR35' to avoid the complexities associated with limited company engagements. However, with the introduction of the tax offset, the additional cost incurred by hirers for inside IR35 arrangements may now exceed the potential tax shortfall that would arise if the same contractor were engaged on a legitimate outside IR35 basis and subsequently challenged by HMRC.

Moreover, it is crucial for hirers to note that if they have taken reasonable care in making the IR35 determination and engaged the contractor through an agency, they would not be liable for any tax shortfall resulting from an HMRC challenge. This highlights the importance of due diligence and robust processes when assessing the IR35 status of contractors.