21st March 2024
Written by Qdos Contractor
The issue of ‘double taxation’ under the off-payroll working rules will soon be solved for businesses – but a little-known flaw in the IR35 legislation means that contractors will continue to see IR35 liabilities overtaxed.
In short, it’s the same issue that has seen businesses ‘double taxed’ when issued with IR35 liabilities. But the mechanism HMRC is introducing for businesses from 6th April isn’t being extended to individuals – something which Qdos is urging the government to correct.
Essentially, contractors who have been issued tax bills for incorrectly operating IR35 in the past may have been overtaxed when paying. There is, however, a way to reclaim these overpaid taxes, which we’ll explain below.
But first, let’s look at where and when this ‘double taxation’ of contractors occurs…
How does ‘double taxation’ affect contractors?
Where contractors have incorrectly operated outside IR35 – prior to the off-payroll working rules, or when engaged by a small business – HMRC issues tax bills to the individual to recover the PAYE liability for the engagement in question.
However, when issuing this bill, HMRC has no process in place to automatically offset the income tax, corporation tax and dividend tax already paid by the contractor. This means the IR35 liability could be inflated, with the contractor’s earnings in the same period effectively ‘double taxed’.
This is yet another flaw in the design of IR35 – one which should be straightforward enough to solve. Despite the fact that end-clients will soon benefit from automatic offsets, the same solution hasn’t been extended to contractors.
What should I do if I think I’ve been overtaxed?
If you’ve previously received and paid an IR35 tax bill, though, there may be some good news. It’s possible to reclaim overpaid taxes from HMRC via an ‘overpayment relief claim’.
Typically, these types of claims need to be made within four years of the end of the relevant tax year or accounting period. With 5th April approaching, payments made in the previous four years – as far back as the start of the 2019/2020 tax year – may be valid, even if the tax bill was accrued before the 2019/20 period.
Given the inherent complexity of IR35, liabilities are often issued years after an investigation is opened. Even where this is the case, you can submit an overpayment relief claim for previous tax years.
Provided you submit your claim before the deadline, HMRC may accept it. With IR35 bills often in the thousands, it’s worth submitting a claim if any overpayments you’ve made are still within the four-year window.
What if I paid my IR35 bill more than four years ago?
All is not lost. Tucked away within HMRC’s guidance, the tax office states:
“You can also accept a late claim, but not a late election, if all the income, profits or gains affected by the claim depended on the outcome of discussions between the person and HMRC which had started but were not complete before the time limit, and the delay in agreeing the figures was not substantially the fault of the person or their agent and could not have reasonably been avoided.”
In short, it means you may have grounds to claim beyond four years. True, there’s no guarantee that HMRC will allow a late claim and they may request further information.
However, the difference between having a claim accepted or rejected could be worth thousands, so it should be pursued.
How is the ‘double taxation’ of contractors playing out in reality?
A contractor Qdos is currently supporting is experiencing this first-hand. Having initially offset the tax already paid when issuing an IR35 bill, HMRC returned with an updated tax liability a year later with the tax not offset – due to it being beyond the four-year window.
How do I submit an overpayment relief claim to HMRC?
Getting an overpayment relief claim into HMRC is straightforward enough, but – frustratingly – there’s no dedicated channel for these claims. Instead, you’ll have to write to HMRC and include the following:
- Your contact details
- Your limited company information
- The tax year (or years) that your claim relates to
- Information about the tax liability you were issued
- The taxes you’ve paid which should have been offset against the liability
You’ll find more information here, but if you have any questions about this or would like to discuss it with one of the team here at Qdos, please contact us on 0116 269 0992.
