IR35 taxes account for a tiny proportion of the tax gap that HMRC calculates “is the difference between the amount of tax due and the amount collected”. With only roughly £1m a year being directly collected through investigations by a team of 40, is enforcing IR35 worth the effort? IR35 does not even get a mention in any of the tax gap tables or documentation. Surely the taxman could better allocate these resources elsewhere?
The tax gap actually worsened between 2011-12 and 2012-13. The amount of uncollected tax was estimated to be £34bn in 2012-13, or 6.8% of total tax liabilities. In 2011-12, it was 6.6% of total tax liabilities, or £33bn. This £100m increase in uncollected tax is despite HMRC receiving a £4.7bn resource budget for 2012-13 that actually rose from 2011-12’s £4.6bn.
The taxman was given more money and the tax gap widened. Does this signify that there is something more fundamental than resources that are at play here?
When announcing the figures, Financial Secretary to the Treasury David Gauke made much of HMRC anti-avoidance activities: “Our continued drive to tackle avoidance means that avoidance is down. In 2012-13 HMRC achieved a compliance yield of £20.7 billion, rising to a record breaking £23.9 billion in 2013-14.”
And yet over the same period, from May 2012, HMRC introduced its new IR35 enforcement framework that included creating three dedicated IR35 compliance teams.
So, HMRC increased its resources and IR35 still failed to get a mention. We can ask the same question: HMRC was allocated greater resources for its compliance activities, but so far there is no indication that this has had any impact.
Could it be that HMRC is not really trying very hard? Or is the reason behind the lack of impact of these greater resources is that the tax gap is in fact wrong?
We know from the results of the House of Lords Select Committee on Personal Service Companies (PSCs) that HMRC has estimated the deterrence effect of IR35 to be £550m. We also know that this is based on, actually, not very much.
This latest tax gap estimate tells us that £7.1bn of the £34bn tax gap is down to taxpayers just getting it wrong. Considering we have one of the most complex tax codes in the world, this is perhaps not surprising. A further £15.4bn a year is due to the hidden economy, tax evasion and criminal attacks. That’s a whole lot more than £7.1bn for making mistakes and £1m for IR35.
How much impact could a 40-strong team of experienced inspectors have on reducing the amount of mistakes we all make and in cutting the amount of tax lost through illegal activities? Probably a lot more than chasing £1m from IR35 enforcement. So why does HMRC persist in wasting its energies in IR35 enforcement – doesn’t the taxman have better things to do?