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HMRC discovers extra £75m of IR35 tax yield, according to Lords’ PSC inquiry evidence

HMRC seems to have discovered that contractors are paying an ‘extra’ £75m of IR35 tax yield over the space of a few weeks. This enormous jump comes mid-way through the Lords’ PSC inquiry, according to documents obtained by ContractorCalculator.

The surprise increase occurred between HMRC delivering its oral evidence on 25 November 2013 to the House of Lords Select Committee on Personal Service Companies (PSCs), and submitting written evidence that, although seen by ContractorCalculator on 9 January 2014, is dated 20 January 2014.

This considerably increases the total ‘Exchequer impact’, or the amount the IR35 tax legislation is supposed to be generating from contractors each year. “In the space of a few weeks, HMRC’s analysts have either found new data or updated old estimates that increase IR35’s total tax take by £75m,” says ContractorCalculator CEO Dave Chaplin.

Oral and written evidence mismatch

During her testimony to peers on 25 November 2013, Rowena Fletcher, HMRC deputy director with special responsibility for the Employment Status Team, confirmed that the original Exchequer impact when IR35 was introduced was £475m. She confirmed when probed that current estimate is broadly the same.

However, in its Employment Status Team – Supplementary written evidence to be submitted to support HMRC’s original oral presentation, the higher total of £550m is shown, despite saying “this current estimate is in line with the estimates we provided to the committee during their evidence session on 25 November”.

In the space of a few weeks, HMRC's analysts have either found new data or updated old estimates that increase IR35's total tax take by £75m

Dave Chaplin, ContractorCalculator

“An additional £75m is certainly not in line with the original estimates,” retorts Chaplin. “It’s a considerable extra sum HMRC appears to be trying to slip into its evidence, possibly because it has seen the strength of the case against IR35 that is being presented to the Lords.”

Exchequer yield and protection

HMRC’s written evidence explains that the “Exchequer impact of IR35…is based on two elements, Exchequer yield and Exchequer protection”. HMRC’s defines its ‘yield’ and ‘protection’ terms as:

  • “Exchequer yield comprises tax and National Insurance contributions, which the Exchequer receives directly as a result of IR35.
  • Exchequer protection comprises tax and National Insurance contributions, which the Exchequer currently receives through Pay As You Earn (PAYE) and which we calculate would not be paid if it were not for IR35.”

The yield is based on those limited company contractors who confirm that they have implemented IR35 in their end of year employer’s annual return.

Exchequer protection is calculated using two measures:

  • Those limited company contractors who would pay themselves higher dividends and lower salaries, if IR35 did not exist
  • “People who are currently directly employed who would incorporate and provide their employment services through a Personal Service Company”, which suggests HMRC may use estimates of umbrella company contractor, agency payroll and fixed-term contract income tax and NICs revenues.

How much is IR35’s Exchequer impact worth?

HMRC estimates that its IR35 Exchequer impact of £550m total breaks down into:

  • £30m from limited company contractors inside IR35, making deemed payments (Exchequer yield)
  • £115m from limited company contractors paying themselves higher salaries, although not inside IR35 (Exchequer protection)
  • £405m from umbrella company, agency payroll and fixed-term contract contractors (Exchequer protection).

The estimate of Exchequer yield of £30m is not provided by HMRC and has been calculated by subtracting the other amounts from the £550m total. At £30m, this IR35 income from limited company contractors caught by IR35 and making deemed payments is significantly lower than the estimates of IR35 tax take made by ContractorCalculator in its 2011 analysis of P35 data.

HMRC confirms that it also collects “additional compliance yield as a result of uncovering non compliance with IR35”, which means income generated from successful IR35 investigations against contractors. For 2012-13, HMRC confirms the amount raised through its compliance activity was £1.1m.

Published: 10 January 2014

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