HMRC has admitted that freelancers working for companies in the UK private sector could reclaim all tax they have paid if their hiring firm is found to have misapplied IR35 rules. Speaking to the Financial Times, HMRC admitted that it was “correct” that contractors could reclaim tax if IR35, which came into force in the private sector in April 2021, had been applied wrongly.
If this was found to be the case, then liability for any tax due for the work performed by the freelancer would fall onto the hiring company. While the rules stipulated that businesses would be liable for tax if IR35 assessments were wrong, until now HMRC had not previously confirmed that workers who had been miscategorised could reclaim tax they had paid.
Addressing the House of Commons Public Accounts Committee this week, HMRC officials confirmed that the issue also impacted the public sector, for which IR35 rules came into force in 2017. Public bodies that failed to apply IR35 rules correctly were forced to pay £263 million in the 2020-21 financial year, but HMRC did not reveal figures regarding how many freelancers had reclaimed taxes.
When questioned by the Commons committee, HMRC Chief Executive Jim Harra admitted that there was a risk that public sector payments for IR35 misapplications could be funding tax repayments to private contractors. Chair of the Commons committee Meg Hillier characterised this as private contractors “basically having their tax paid by the taxpayer.”
Harra said that the effectiveness of IR35 rules relied on hirers being incentivised to get determinations right, but acknowledged that the liabilities that public bodies had incurred demonstrated that some were struggling.
HMRC’s admission that self-employed workers may be able to claim their taxes back has prompted widespread comment within the freelance sector. IR35 Shield CEO Dave Chaplin called the situation “bizarre”, pointing out that IR35 had been introduced to ensure contractors paid more tax, but “now they could end up paying no tax”.
Qdos CEO Seb Maley added that, as well as the financial repercussions, it could become “an administrative nightmare for HMRC”, if large numbers of freelancers tried to reclaim tax.
