HMRC figures prove that IR35 acts as nothing more than a “phony, subsidised loss leader”, says ContractorCalculator CEO Dave Chaplin. “For HMRC to achieve £1m in IR35 tax each year that it should be requires an average 28% success rate against the target 250 cases. HMRC’s IR35 teams just aren’t getting anywhere near that – they can’t even achieve 3%.”
IR35 data obtained by ContractorCalculator covering the first tax year following the introduction of HMRC’s new administration framework shows that of the 256 cases opened in 2012/13:
- 1.95%, or five, of the cases have so far paid any additional tax, totalling just over £70,000, or approximately £14,000 for each contractor
- 29%, or 76, of the cases remain open. Some of these may be close to two years old. All will be between one and two years old
- 68%, or 175, of the cases were closed with no additional tax yield
- To achieve £1m in additional tax yield from IR35, a figure comparable with previous years, a further 65 cases at £14,000 in additional average yield per case will be required, suggesting HMRC must secure an average of £14,000 from nearly all of the cases left open from 2012/13
- HMRC’s success rate during 2012/13 was 2.9%. This suggests that the likelihood of the taxman reaching £1m during the 2012/13 tax year is small.
Chaplin is scathing of what the figures reveal: “Taxpayers continue to subsidise this IR35 loss-leader that we know is phony because the tax is not bringing in any revenue from other sources. HMRC has simply been unable to substantiate its claim that IR35’s deterrent effect generates £550m of tax.
“If HMRC were a business, it would only be able to afford to pay its 40-strong IR35 compliance team about £1.06 an hour based on its own performance figures.
The latest data from HMRC fills an important gap
Until now, HMRC has fudged its data so that it has not been possible to compare on a year-by-year basis the performance of its new administration framework, its compliance team and its business entity tests (BETs), which were introduced in 2012.
“What this data shows is surely what the IR35 Forum’s review currently evaluating the success of HMRC’s new administration must conclude: IR35 is not working,” continues Chaplin.
Taxpayers continue to subsidise this IR35 loss-leader that we know is phony because the tax is not bringing in any revenue from other sources
Dave Chaplin, ContractorCalculator
“Furthermore, the recent House of Lords Select Committee on Personal Service Companies report recommended that HMRC needed to clarify the relationship between the costs of enforcing IR35 and the tax yield generated.”
Questions to and responses from HMRC
HMRC had already shown that during 2012/13, 256 cases had been opened where IR35 was the main risk. Further releases by HMRC confirmed that 85 of those cases had been closed because they were low risk, leaving 171 potentially remaining open.
Using a Freedom of Information Act request, ContractorCalculator asked HMRC four questions. “Of those 171 cases remaining open:
- How many have been closed with no additional tax yield?
- How many are still open?
- How many have been closed with extra tax being collected?
- How much extra tax was collected?”
HMRC confirmed that:
- “90 closed for nil in 2013/14
- 76 open at the end of 2013/14
- £70873 collected from those 5 cases (covering all identified liabilities including tax, penalties and interest).”
From the response, it has been possible to calculate how much tax was raised during 2012/13 from cases opened during that period, and the status of those that had not been closed.
How the numbers stack up
“During a single year, the dedicated IR35 compliance teams closed five cases generating £70,873, which is an average of £14,000 each,” says Chaplin. “This is about what a contractor earning £500 a day for a year’s work might owe in back taxes if found to be inside IR35.”
Assuming the IR35 inspectors have a typical work pattern, Chaplin has calculated that the revenue generated by IR35 during 2012/13 could only sustain an hourly rate of £1.06 for those who generated that income.
But based on the taxman’s historical yield from IR35 compliance, and what HMRC told the Lords, it should be expecting to generate at least £1m each year. If that’s the case, Chaplin notes that there is quite a shortfall: “There is a £930,000 deficit for 2012/13.
“The compliance teams would need to close 66.42 cases at £14,000 per case to meet that target, requiring a success rate of 86%, from the 76 outstanding cases from the year. Based on the 2.9% success rate achieved so far during 2012/13, the chances of winning so many cases seem slim.
“Even if HMRC managed to win half of the outstanding cases, it would have to generate £24,000 per case. This would require catching nearly forty contractors on day rates in excess of £800 per day inside IR35, which seems equally unrealistic.”
Chaplin concludes: “One has to question whether the interventions by HMRC IR35 specialists are even worth it. Do they really signal such a deterrent? And we can’t even suggest the compliance activity is a loss leader. That would imply other secondary revenue is being generated elsewhere, and there is just no evidence for that.”