Contractors paid only £219,180 in IR35 tax in the 2010-2011 tax year. And in the same period there were only 23 reviews in which IR35 was considered to be a risk, according to new data published by HMRC. But could that all be about to change?
With a tax gap of £35bn and HMRC under pressure to increase yields from compliance activity, contracting sector experts fear this could be the ‘calm before the storm’. It seems likely that HMRC’s review of IR35 processes via the IR35 Forum could result in a renewed campaign targeting contractors.
“The ever decreasing number of compliance reviews and tax yields over the last five tax years suggest that contractors have become savvy to HMRC’s current IR35 investigation tactics,” explains ContractorCalculator CEO Dave Chaplin. “HMRC intends to review its IR35 enforcement strategy as part of its work with the IR35 Forum, which could lead to specialist compliance teams targeting contractors with greater success.”
But according to PCG’s Managing Director John Brazier, the low yields and small number of reviews – just 322 in the last five years – confirm that IR35 should have been scrapped when the Chancellor had the opportunity.
“Despite the now evident worthlessness of IR35 it remains in place and, as directed in the Budget this year, its administration is being reviewed,” says Brazier. “PCG is currently working hard with the IR35 Forum to reduce the impact of IR35, but this new data reiterates what PCG has always believed: IR35 should be scrapped.”
According to Chaplin the data, which was published by HMRC in response to a Freedom of Information (FOI) request, is difficult to analyse because tax yields do not match the number of IR35 investigations.
“The information, whilst indicative of the poor results HMRC is achieving in applying IR35 in recent years, is also typical of data released under the FOI Act,” says Chaplin. “HMRC has offered only exactly what was requested, and not what might be helpful for policy makers trying to assess the value of retaining IR35 as a tax-gathering mechanism.”
The results of the September 2011 IR35 Forum meeting are eagerly awaited, as HMRC was due to update the Forum on the development of its operational strategy for better administering IR35. If, as is widely feared, HMRC opt for taking a tougher line, the investigation and yield figures for 2012 could look much worse for contractors.