IR35 reforms: IT contractors urged to reclaim tax they may have overpaid in off-payroll settlements

IT contractors found to be incorrectly operating outside of the IR35 off-payroll working rules during the 2019-2022 tax year have until 5 April 2024 to reclaim potentially thousands of pounds in tax from HM Revenue & Customs (HMRC) they may have overpaid.

Contractor insurance firm Qdos is urging contractors to check if they are eligible to reclaim any tax they may have overpaid as a result of HMRC failing to take into account the income, corporation and dividend tax they had already paid when calculating their IR35 liabilities.

“Individuals who have been issued IR35 tax bills are likely to have been overtaxed when paying, as HMRC often doesn’t automatically offset the income tax, corporation tax and dividend tax these workers may have already paid on their income when the IR35 liability is calculated,” said Qdos in a statement.

The start of HMRC failing to factor in the tax contractors may have already paid when calculating their IR35 liabilities can be traced back to the roll-out of the public sector IR35 reforms back in 2017, but it is unclear how many contractors may have been affected over the years.

The matter has, however, recently been addressed via a legislative tweak to how the IR35 legislation works , following years of accusations that the government agency has been over-collecting from non-compliant public and private sector entities.  

This legislative change is due to come into force from 6 April 2024 and means that the amount of corporation, dividend and income tax contractors have already paid will now be factored in when HMRC calculates how much tax is owed by a non-IR35 compliant organisation.

As confirmed by Qdos, though, affected contractors can make an overpayment relief claim to recoup any tax they may have overpaid, but they need to do so within four years of the end of the tax year their IR35-related tax bill was paid.

As a result, any contractors who paid an IR35 tax bill during the 2019-2020 financial year must submit their overpayment relief claim by 5 April 2024 or risk missing out.

Since the conclusion of the 2019-2020 tax year, there have been several high profile examples of central government departments who are known to have fallen foul of the IR35 rules and ended up paying HMRC millions of pounds in unpaid tax.

These include the Department for Work and Pensions (DWP), which had to pay HMRC £87.9m during the 2020-2021 financial year following the discovery of “historic errors” in how it assessed the tax status of its contractors.

“While IR35 investigations can take longer than four years to conclude – and many contractors assume they won’t be eligible to reclaim – HMRC may accept claims which are started before the deadline,” added Qdos. “With potentially thousands of pounds on the line, contractors should pursue any overpaid taxes as a priority.”  

Seb Maley, CEO of Qdos, said the IR35 legislation’s “double taxation” issue is a flaw that many contractors may be unaware of, despite various contracting market stakeholders calling on the government for several years to address it.   Now it has been sorted, contractors need to urgently look into whether they are eligible to make a claim and, if so, submit it quickly.

“IR35 has been a source of controversy since its introduction in 2000, and this ‘double taxation’ of contractors is yet another flaw in the legislation’s design – albeit one that is widely overlooked. The four-year time limit on claims adds insult to injury too – limiting the opportunity of these individuals to reclaim overpaid taxes,” said Maley.

“Businesses engaging contractors have also previously been overtaxed when settling IR35 liabilities. But HMRC has found a solution for that, effective 6 April this year. There’s no reason that this fix can’t be extended to contractors – something HMRC should be looking at urgently.

“Until then, it’s essential that contractors are aware of the avenues open to them so that they can recover any overpaid taxes they are due. Given the economic climate, this should be a priority.”