Two statutory initiatives have been taken by the government in the Spring budget to make contracting through personal service companies more attractive to both end user clients and contractors.
The first measure
The first measure was introduced by the Finance Act 2024 provides that where a worker who has been incorrectly treated as self- employed, and the deemed employer therefore had to pay the income tax and NIC on the basis that he or she was as an employee, HMRC can now deduct tax paid by the worker from the tax and NIC due from the deemed employer. Until 6th April 2024 tax and NIC actually paid by the worker and their PSC intermediary could not be offset against the deemed employer’s liability. It means that the cost of the liability is shared more fairly between the deemed employer and the worker.
This is potentially game changing because the double taxation of IR35 under the Off Payroll Working Rules was a problem. HMRC collected more than it should. It gave risk-averse businesses another reason not to engage contractors because if they were found to be non-compliant HMRC would over tax them. So the result is a significant reduction in the amount of tax due following an “inside IR35” finding being made. These new rules apply retrospectively to 2017 in the case of public authority clients and to 2021 for medium and large sized private sector clients.
The second measure
This is an initiative to crack down on non-compliant umbrella companies who are perceived as having abused their role as intermediaries with responsibility for managing PAYE deductions. Cautious hirers fearful of the risks of incorrect categorisation of a contractor’s tax status have increasingly relied on umbrella companies. This has created a new layer of supply chain challenges so the government has empowered HMRC to transfer the correct tax debt to the end hirer client and others in the contracting chain with a penal rate of 35% of the incorrectly assessed assignment rate as opposed to an IR35 compliant rate of 14% of a correctly assessed assignment rate. The theory behind the initiative is to cause hirers to engage with genuine independent contractors outside of IR35 via PSCs.
Practical tip
Be open minded about the scope for engaging again with skilled workers who provide their services through intermediate personal service companies or general partnerships. If properly managed you can do so outside of IR35.
