IR35 Changes and Tax Refunds: What Contractors Need to Know
The past decade has seen several significant changes to the off-payroll working rules, commonly known as IR35. Until 2017, it was up to individual employees to determine their IR35 status, but the legislation changed in that year, making it the responsibility of hiring organisations to decide whether a contractor was genuine or a ‘disguised employee’. The new rules introduced a number of tests to determine a worker’s status. Here, we explore the changes to IR35 and why they mean that some individuals may be owed a tax refund.
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In 2017, the new IR35 rules took effect for organisations in the public sector, with those in the private sector required to comply from 2021. The changes meant that in some instances, when a worker or contractor’s IR35 status was incorrectly determined, two lots of tax was being paid on income. In 2023, HMRC held a consultation designed to address this.
In cases where individuals have wrongly been deemed to be outside IR35, they would have already paid Income Tax and National Insurance Contributions (NICs) on their income, in the belief they were outside the rules. However, if HMRC then finds that the employing organisation has made an error, the employer becomes liable for the worker’s Income Tax and NICs. The result is effectively a double taxation on the same income.
What has changed?
Until 6 April 2024, if HMRC successfully challenged an IR35 status determination, the employer was liable for tax that had already been paid. The contractor was then supposed to be notified that they had the right to claim a refund. The process, however, was complicated and many contractors did not receive notification.
Since 6 April 2024, a successful challenge of an IR35 determination means that HMRC can collect an estimate of the difference between the tax already paid when the contractor was deemed outside IR35, and the tax that is due from the employer. This enables HMRC to collect the correct amount of tax without it being paid twice.
When can workers claim a tax refund?
It’s important to note that although HMRC set aside nearly £88 million for IR35 tax refunds, it was not necessarily notifying workers of their right to claim. 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, meaning workers who wish to claim must be proactive.
Public sector workers and intermediaries can claim an IR35 tax refund for any period going back to 6 April 2017. Those in the private sector can make claims going back to 6 April 2021. However, the process is not straightforward. Individuals must be able to prove their incorrect status determination and there must be a review to support their claim. Moreover, if a claim is made incorrectly, penalties apply based on the percentage of the amount claimed, even if no refund has been made.
Help with IR35
Navigating the changing regulations around IR35 is challenging. If you need help to clarify your IR35 status or think you could be owed a tax refund, speak to an accountant today for assistance.
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