From the start of the new tax year on 6 April, businesses across the UK have benefitted from a critical change in the IR35 tax legislation, which significantly reduces the financial risk of hiring contractors.

This latest reform ends the long-criticised ‘double taxation’ under the off-payroll working rules, whereby businesses faced excessive tax bills due to incorrect status determinations of contractors.

Under the change, HM Revenue & Customs (HMRC) will now automatically account for taxes previously paid by contractors, such as income tax and corporation tax, when assessing IR35 liabilities.

This change promises to slash many companies’ tax liabilities and streamline the process of engaging contractors operating via personal service companies.

What was the key issue?

The issue of ‘double taxation’ has been a substantial barrier for many businesses, deterring them from engaging contractors due to the fear of inaccurate IR35 determinations and the resultant inflated tax demands.

The previous system did not consider taxes already paid by contractors, leading to unfairly high tax bills for businesses.

This major shift comes after HMRC’s trial of the new offset mechanism from September of the previous year, which has already seen some businesses benefit from reduced liabilities.

Starting from the beginning of the 2024/25 tax year, any unsettled IR35 bills will be adjusted to reflect the correct tax amount, with potential reductions of about 75 per cent in total liabilities, ensuring businesses pay only what is truly owed.

This adjustment is retroactive, applying to cases dating back to April 2017, offering considerable relief and clarity to businesses previously impacted by this issue.

What does this mean for you?

With the removal of this financial deterrent, experts predict a surge in the number of businesses willing to engage contractors, potentially increasing opportunities for freelancers looking for engagements that qualify as outside IR35.

This change not only rectifies a long-standing issue but also opens a new chapter for freelancers and businesses alike.