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HMRC admits it “does not hold” the vital data needed to evaluate OTS IR35 reforms

HMRC has revealed that it “does not hold” data vital for the evaluation of the Office of Tax Simplification’s (OTS) suggested IR35 alternatives. And the taxman’s response, which came in reply to a Freedom of Information request submitted by ContractorCalculator, shows that vital information on the cost of IR35 investigations is simply not available.

Questioned about the costs of mounting the MBF Design Services enquiry and tribunal case, plus the estimated extra revenue HMRC might have gained had it won the case, HMRC’s official response was to admit that it does not hold such data. In fact, it seems that recording the time spent by officers on individual cases was only introduced in April 2010.

If, as suggested by its response to ContractorCalculator, HMRC does not keep records of the costs of mounting IR35 enquiries and tribunals, and has limited data on the additional revenue generated by IR35 compliance activity, then vital information is missing that would inform the debate about IR35 reforms.

More data needed to evaluate OTS IR35 alternatives

In the interim report on the Small Business Taxation review, OTS Chairman Michael Jack has identified “that any future decision on…abolishing IR35 altogether would require underpinning by a much better quality of data than presently seems to be available”.

There are clearly gaps in the data about the true extent of IR35’s impact on contractors. These gaps will need to be filled to enable the Chancellor George Osborne to make a decision about IR35’s future when the OTS’s final report is published in June 2011.

It might just be possible for HMRC to include additional questions in this year’s P35 Employer Annual Returns due to be submitted in May to obtain further taxpayer data, and specifically generate information about contractor behaviour.

If this were to happen, the resulting taxpayer data could be used in tandem with HMRC’s time records from April 2010 to provide information about the 2010-2011 financial year. This might provide the Chancellor with additional data to evaluate the OTS’s IR35 reform options.

No case cost centre records prior to April 2010

HMRC confirmed to ContractorCalculator that “prior to April 2010, HMRC did not record officers’ time against individual cases”, although it did state that the type of work, such as enquiry work or training, is recorded.

Nor are the costs of operations such as the MBF Design Services enquiry and tribunal calculated, as HMRC “does not hold any central costings information at the individual operation level and HMRC costs are not broken down against individual cases”.

Any future decision on abolishing IR35 altogether would require underpinning by a much better quality of data than presently seems to be available

Michael Jack, Chairman, OTS

HMRC also confirmed that it holds no information about the estimated extra tax revenue, or ‘yield’, HMRC would have gained if it had won the MBF Design Services case, and highlighted Freedom of Information Act rules saying it is not required to make such estimates public, even if they exist.

Without evidence to the contrary, this suggests that during much of the period that IR35 has been in force, HMRC is unlikely to have completed any kind of return on investment calculation or risk assessment prior to starting enquiries, or when making decisions on whether to continue them.

Improving ‘elements of HMRC administration’

In addition to its options for IR35 reform, the OTS calls for improvements in the way that HMRC administers the tax system. OTS says such improvements “may be even more beneficial than simplification of legislation” and specifically calls for “greater certainty” and “improving information given out by HMRC staff”.

However, when asked to confirm whether the MBF Design Services case was pursed in order to establish case law, HMRC’s response suggests that it has a journey to travel before it is prepared to be open in its objectives and dealings with contractors.

“HMRC neither confirms nor denies it holds the information, because saying so would necessarily tell you something about this entity,” it replied when asked about the objectives of the MBF Design Services case. “Such information, if held, would be held for HMRC's function to assess and collect tax. HMRC has a policy whereby we do not disclose information that relates to the internal workings of the department.”

HMRC continues: “We consider that such a disclosure would jeopardise the assessment or collection of tax and provide information that might enable a taxpayer to arrange their affairs to reduce their tax liability.”

HMRC and contractors must meet halfway

The tone of this response suggests that the OTS faces challenges to overcome barriers from within before significant progress can be made to repair the relationship between HMRC and small businesses, including those run by contractors.

Whether HMRC can shift its thinking and meet contractors halfway, particularly when facing a significant reduction in resources as a result of budget cuts, will determine whether the OTS’s recommended reforms of the administration of the tax system will ultimately result in simplification, and a better deal for taxpaying contractors.

Published: 15 March 2011

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