IR35 Investigation Avoidance
Exactly how much revenue the taxman’s enforcement of IR35 earns the government has been officially revealed for the first time.
Figures from HM Revenue and Customs confirm what freelancers have suspected since the tax rule came in a decade ago: enforcing IR35 returns only a pittance.
In fact, the department’s IR35 compliance team added just £9.2m to Treasury coffers between the tax years of 2002/03 and 2007/08; the equivalent of a mere £1.5m a year.
Not only is this sum just a drop in the tax ocean, but it is also well short of the £220m that officials predicted IR35 would earn per year via National Insurance contributions alone.
The Professional Contractors Group, which obtained the figures, said “IR35 makes very little money for the government and ... it may even cost more to implement than it actually brings in.”
Figures from HM Revenue and Customs confirm what freelancers have suspected since the tax rule came in a decade ago: enforcing IR35 returns only a pittance.
So, what does this mean to you when considering your exposure to IR35?
Well, firstly this current disclosure does not include the state’s income from the deterrent effect of IR35, nor does it factor in its earnings from voluntary compliance by umbrella companies.
A PCG spokesman also clarified that the group asked HMRC to provide data only on actual ‘revenues raised as a result of compliance activity specifically categorised as IR35.’
However, secondly, it shows that for contractors genuinely trading under personal service companies the chance of attack by HMRC is very limited.
So the issue is about ‘doing the right thing’ and keeping below the HMRC’s radar. There are some basic things to avoid, such as:
- Only drawing dividends where profit allows
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Paying taxes correctly and on time
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Ensuring expense claims are reasonable not out of proportion to earnings
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Using a reputable accountancy firm as your tax agent. For a full list of factors contact Orange & Gold on 0845 272 4009
Returning to the results of HMRC’s IR35 compliance activity, IR35 advisers at Bauer & Cottrell reflected: “The key issue is not about what has been raised from compliance work, but what HMRC has raised as a result of IR35 overall.
“IR35 was used as the basis to outlaw managed service companies and this resulted in thousands of contractors switching to umbrellas, levying PAYE and NICs on all engagements.
“[In addition] the Revenue’s success in the courts has no doubt made many contractors accept they are inside IR35 and brought further full PAYE and NICs.”
This is good news for contractors. The more people who concede the battle before entering the field of play then the less concern to HMRC are those who remain to fight. The last few years have shown that HMRC doesn’t seem to have the resources to roll out a concerted effort in ensuring compliance.
Records provided by the PCG show that of the 1,468 IR35 investigations its experts have been involved with, HMRC proved additional tax was owed only six times. The balance is in favour of the sensible and well prepared contractor every time.