For years, fear of crippling tax bills kept many businesses away from flexible talent. Under the new IR35 Reforms rules, if HMRC reclassified a contractor as “Inside IR35,” firms could face a tax bill up to five times higher than the true liability, a result of unfair double taxation that penalised hirers.
That landscape has now changed - dramatically.
"These changes turned IR35 from a punitive, unpredictable regime into a fair, stable, and predictable compliance framework."
A Turning Point for IR35
In April 2024, the Government introduced the IR35 offsets fix, a pivotal reform in the Finance Act 2024 that corrected a long-standing double taxation flaw in the off-payroll rules.
Retrospective to April 2017, this change ensures fairness and balance by allowing taxes already paid by contractors and their companies to be set off against any liability owed by the hiring firm.
This single fix has cut potential liabilities by around 75%, reducing exposure from roughly 50% of contract value to around 10%. It has turned IR35 from a punitive, unpredictable regime into a fair, stable, and predictable compliance framework.
But the offsets fix is just one part of a broader transformation. Shortly after the fix, in September 2024, the Supreme Court clarified the legal tests for employment status, and firms have been passing HMRC compliance checks cleanly and quickly.
Together, these three key events - legislative reform, clarified case law, and measured compliance - have made IR35 a manageable and low-risk process for compliant businesses.
So, what is this IR35 offsets rule?
Before the offsets changes, if HMRC reclassified a contractor as a deemed employee “Inside IR35”, the hiring firm was forced to pay full PAYE and NICs as if the worker had been an employee, even though the contractor’s limited company had already paid corporation tax, dividend tax, and NICs. This resulted in double taxation and inflated liabilities, often up to five times the true cost.
Now, any taxes already paid by the contractor or their PSC are deducted from the hiring firm’s liability. HMRC still collects the correct overall tax, but hiring firms no longer overpay.
The offsets rule ended the injustice and removed the main barrier that caused many organisations to impose blanket bans on contractors when the off-payroll reforms first arrived.
What does this mean for hiring firms and agencies?
For hirers and agencies, the difference is transformative:
- Lower risk: potential liabilities fall to under 10% of contract value.
- Fairer outcomes: Firms pay only what is genuinely owed; no more unfair over-collection.
- Predictable costs: Smooth settlements have replaced costly, drawn-out disputes.
In short, IR35 risk is now manageable, measurable, and fair. With hirers no longer paralysed by fear of unfair tax hits, demand for flexible talent is rebounding. Blanket bans are being lifted, and IR35 is no longer a blocker to contracting.
How to Stay Low-Risk
To make the most of this fairer environment, firms should adopt a five-step approach:
- Use expert-reviewed contracts
- Conduct robust IR35 status determinations.
- Train staff, to ensure the rules are correctly applied.
- Implement and document robust IR35 processes.
- Engage IR35 specialists during HMRC compliance checks.
Businesses following these steps are typically considered “low risk” by HMRC, meaning compliance checks are straightforward and stress-free.
Key takeaways
- The IR35 offsets rule has transformed the landscape. By removing the risk of unfair, inflated tax bills, it makes hiring contractors on an outside IR35 basis a far safer and more attractive option for businesses.
- Potential tax risk falls to less than 10% of contractor fees.
- As long as you assess contractor status carefully and maintain a robust compliance process, your exposure is limited.
Put simply: contractor hiring is now low risk.
Book a free consultation with us to review your contractor strategy and start hiring outside IR35 with confidence.
