IR35 Truth Revealed

Last week a freedom of information request revealed the true story behind HMRC’s IR35 activity over the last few years.

This has led to much condemnation within the contracting community, with the results seemingly pointing towards a virtually unused, flawed legislation. But should we be a little more cautious in our criticism?

Let’s look at the actual figures released, which cover the previous 5 tax years:

Tax Year No. of Enquiries Total Yield
2006 – 2007 158 £1.9m
2007 – 2008 104 £1.7m
2008 – 2009 25 £1.4m
2009 – 2010 12 £155,502
2010 – 2011 23 £220,000

So what does this tell us?

Firstly, we can see that the number of enquiries actually carried out has declined dramatically since 2008. This was no secret though; HMRC ploughed a lot of resources into the construction industry, so the focus moved from IR35 to status arguments of a slightly different nature.

It is also clear that the cumulative yield is low. £220k in the last tax year is virtually nothing when compared to the vast industry that IR35 has created.  This is what has drawn the most criticism from bodies such as the PCG.

Indeed, off the back of these figures there have been numerous renewed calls for IR35 to be scrapped. But that’s not going to happen, with the government pledging to keep but ‘improve’ the legislation at the last budget. The so-called ‘IR35 Forum’ are currently trying to decide how best to do this.

But there is perhaps more to these figures than initially meets the eye.

The main reason the government didn’t scrap IR35 was the fact that it is a very successful deterrent. Think about all the thousands of contractors using umbrella companies. They all pay far more tax than their limited company counterparts, but how many of them would choose the incorporation route were it not for the risk of IR35?

This is a key point that people seem to forget when arguing that IR35 is useless. It’s clearly not, or it wouldn’t exist any more.

The second, perhaps more concerning point is the fact that HMRC are winning cases. Yes, the number of enquiries is minimal, but they collected an average of nearly £10k per case in the last tax year. That, to me, is quite surprising.

Over the years HMRC have been almost laughed at because of their apparent incompetence when handling these cases. It seems this isn’t strictly true. Whilst experienced professionals like Qdos and Abbey Tax can display very impressive win/loss ratios, HMRC are obviously having some significant successes.

Finally, and importantly, the inevitable result of the government’s review on IR35 is that there will be more enquiries. This is the only way they will be able to test the changes they have made.

Interestingly, status experts Qdos have reported two new IR35 enquiries amongst their clients in the last week!

So, take the sensationalist reporting over these statistics with a pinch of salt for they do not tell the whole story. My concern (and prediction) is that that figure of 23 cases in 2010-2011 will multiply over the coming months, with the sums harvested doing the same.

 

6 Comments

  • Oded says:

    You say “but they collected an average of nearly £10k per case in the last tax year.”.

    This seems to suggest that they won every case. I would say that HMRC lost most of the cases, and the yield is for the very few they have actually won.

  • TtD says:

    I have said the same before- it’s not the high profile cases, it’s all the rest of it that works for HMRC.

    Few of us would have a problem with it if they learned to leave people alone that are clearly trying to operate as self-employed and are paying a sensible amount of NI (and a salary of about £10.5k is enough to pay the same NI as a Sch D person does when compared to the total EE and ER NI paid by the Ltd Co contractor).

    The “agency temps” are a fair target, since the benefits of incorporation are largely gained by the agency rather than the temp, since the agency avoid ER NI.

    If HMRC would learn to make a sensible subjective judgement before pursuing these cases I’m sure they would find a lot more acceptance among the freelance community.

  • Seb Maley says:

    [quote name=”Oded”]You say “but they collected an average of nearly £10k per case in the last tax year.”.

    This seems to suggest that they won every case. I would say that HMRC lost most of the cases, and the yield is for the very few they have actually won.[/quote]

    Yes, sorry, I wasn’t suggesting that they had won each case – just illustrating the fact that the yield is surprisingly high.

  • Seb Maley says:

    [quote name=”TtD”]I have said the same before- it’s not the high profile cases, it’s all the rest of it that works for HMRC.

    Few of us would have a problem with it if they learned to leave people alone that are clearly trying to operate as self-employed and are paying a sensible amount of NI (and a salary of about £10.5k is enough to pay the same NI as a Sch D person does when compared to the total EE and ER NI paid by the Ltd Co contractor).

    The “agency temps” are a fair target, since the benefits of incorporation are largely gained by the agency rather than the temp, since the agency avoid ER NI.

    If HMRC would learn to make a sensible subjective judgement before pursuing these cases I’m sure they would find a lot more acceptance among the freelance community.[/quote]
    Agreed and, to be fair, this is part of the IR35 Forum’s remit (to define what a ‘high risk’ target actually is).

  • Rob Avery says:

    Do the readers not think IR35 investigations are likely to increase with the 4,000% increase in investment in tax investigations generally announced by the Govt recently?

  • TKMacs says:

    [quote name=”Rob Avery”]Do the readers not think IR35 investigations are likely to increase with the 4,000% increase in investment in tax investigations generally announced by the Govt recently?[/quote]
    And 2,000 extra tax inspectors!

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