Contractors have seen reviews of IR35 before and had their hopes dashed by the Chancellor and HMRC. So should we feel any more hopeful about the House of Lords Select Committee on Personal Services Companies (PSCs) inquiry into “the consequences of the use of personal service companies for tax collection?
Based on the first round of evidence given by HMRC, a cynic might say that this is a stage-show designed to demonstrate to George Osborne that the choice he made following the Office of Tax Simplification’s review to better administer IR35 has worked. Everyone seems to be saying it is better administered.
But maybe this time, the determination of the Lords to get to the truth and properly establish whether IR35 is actually delivering a return on investment for the taxpayer will be helpful.
Looking at the figures presented by HMRC in the first evidence-gathering session, does it really matter if IR35 continues to be enforced? Although investigations have increased to 250 per year, HMRC estimates that there are 200,000 personal service companies.
In other words, the chances of actually being investigated are a miniscule 0.125%. Even when HMRC has found a PSC target and generated its 250 investigations, only five of these are going to tribunal each year. That means there’s an incredibly small risk, even to any contractor who may consider themselves as borderline inside IR35.
And the IR35 service industry is such a well oiled machine that any contractor with insurance and an IR35 expert on their side will be able to deflect an HMRC inspector with relative ease.
Plus, when you add the fact that there is no statutory definition of a PSC, even HMRC’s mighty databases and data mining capabilities have over 600,000 companies with only directors and no employees to sift through to find targets.
No wonder we’re being told HMRC is focusing on contractors in the public sector, because the taxman has already been handed a list of named targets, following the review of contractor use in the public sector resulting from the off-payroll rules.
As IR35 fundamentally relies on self-policing with harsh deterrents for those who get caught, and because the chances of actually getting caught are so tiny, borderline contractors are simply going to go into denial and carry on as normal.
IR35 just can’t be policed effectively. And the deterrent effect that, according to HMRC’s evidence to the Lords, is supposed to be generating nearly half a billion pounds in tax each year, just isn’t working.
Let us hope that this is the message the Lords will take away from this exercise. If they look at the evidence, they should recommend scaling back HMRC’s IR35 enforcement efforts, diverting them into compliance action which will actually generate some return on investment for the taxpayer.