Just like the characters in a detective novel, IR35, the P35 Employer Annual Return and new revelations from the latest series of Freedom of Information (FOI) requests have all played a role in uncovering a true mystery: where are HMRC’s missing IR35 millions?
According to an FOI request by ContractorCalculator, over the last ten years between 2,000 and 29,000 contractors each year have self-certified themselves as being inside IR35, and therefore making a deemed payment or taking employment income as a result.
We’ve worked that out based on what HMRC told us about the number of businesses submitting P35 Employers Annual Returns who have answered ‘yes’ to Part B of Question 6 between 2000 and 2010. The exact question varies from year to year, but essentially businesses submitting a P35 saying ‘yes’ to that question have an employee caught by IR35 and paying a deemed payment or receiving employment income.
If we then take the example of a contractor on a modest income of £35 per hour, he or she would pay approximately £10,000 extra a year in income tax and National Insurance Contributions (NICs) if they were inside IR35 and making a deemed payment, or taking employment income rather than a low salary and dividends.
That means, very roughly, that the Exchequer should have been raking in between £20m and £290m in additional income tax and NICs each year from contractors caught by IR35. Applying that crude model to the last ten year’s worth of P35 data revealed to ContractorCalculator provides the following annual totals of IR35 tax take:
- 2000/01: 7,000 said yes = a minimum of £70m
- 2001/02: 10,000 said yes = a minimum of £100m
- 2002/03: 7,000 said yes = a minimum of £70m
- 2003/04: 2,000 said yes = a minimum of £20m
- 2004/05: 5,000 said yes = a minimum of £50m
- 2005/06: 6,000 said yes = a minimum of £60m
- 2006/07: 6,000 said yes = a minimum of £60m
- 2007/08: 29,000 said yes = a minimum of £290m
- 2008/9: 10,000 said yes = a minimum of £100m
- 2009/10: 10,000 said yes = a minimum of £100m
Grand total = a minimum of £920m
[Key to the above: financial year: total that year ticking ‘yes’ to Part B of Questions 6 multiplied by an assumed minimum £10,000 tax/NIC take equals minimum annual IR35 tax income. All data supplied by HMRC to the nearest ‘000].
The annual totals above fall well short of the additional £220m in NICs alone forecast by HMRC’s own impact assessment in 1999. But based on HMRC’s own figures of how many contractors were caught by IR35, the tax should have generated very roughly nearly £1bn in additional tax revenues since its introduction in 2000.
But according to another FOI request, this time by PCG, between 2002/03 and 2007/08, HMRC has said that IR35 directly raised £9.2m. Although we don’t know the exact details of the question PCG asked nor the exact response from HMRC, this figure is not the £2.2bn in NICs HMRC originally forecast would be generated. It is also not anything like the £1bn the P35 data HMRC provided to us suggests it might have been. That’s a lot of change to lose down the back of the sofa.
So where are HMRC’s missing IR35 millions?
Published: Wednesday, November 09, 2011
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