Race against the clock for contractors to claim back overpaid IR35 bills

Contractors who have been hit with tax bills for incorrectly operating outside the IR35 legislation are being urged to check whether they may be eligible to reclaim overpaid taxes. There could be thousands of pounds at stake for each individual – but time is running out for them to claim their money back.

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.

According to Qdos – a contractor insurance firm – these workers can reclaim their money via an overpayment relief claim. For the claim to be valid, it needs to be made within four years of the end of the tax year that the bill was paid. For example, contractors who paid IR35 tax bills in the 2019/20 tax year must complete their claim by 5^th April 2024 – even if their payment predates the tax years in question.

“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,” says Qdos CEO, Seb Maley. “The four-year time limit on claims adds insult to injury, too – limiting the opportunity of these individuals to reclaim overpaid taxes.

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. With potentially thousands of pounds on the line, contractors should pursue any overpaid taxes as a priority.

The IR35 legislation was introduced in 2000 to prevent ‘disguised employment’. This is when someone operates as an employee but isn’t treated as one for tax purposes – which is considered tax avoidance.

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

“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.”

Where HMRC suspects disguised employment, it issues a tax bill to recover the income tax and national insurance owed. However, these rules have been widely criticised over the years for their complexity and flaws – one of which is the so-called ‘double taxation’ of IR35, which currently impacts contractors and businesses engaging these workers.

The IR35 rules were reformed in April 2021 to move liability from the contractor to the party engaging them, but this only applies to medium or large engagers. Contractors working for small companies are still responsible and liable for IR35, as they are for any engagements which predated the reform.

From 6^th April, HMRC will offset the tax already paid by a business in the event of non-compliance. But as it stands, there is no solution for contractors facing the same challenge – something HMRC has been urged to correct.

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