IR35 has failed HMRC as an effective tool to combat disguised employment. Not only are the chances of HMRC correctly targeting contractors slim: when they do find a victim HMRC’s success rate is dismal. But let’s not go on about IR35’s failings too loudly or the taxman might try to fix it by introducing something much, much worse that works.
When they were published in February 2015 in response to a Parliamentary Written Question, the latest IR35 performance statistics were not something that HMRC could be proud of. IR35’s tax yield collapsed to only £430,000 during the 2013/14 tax year, from £1.1m in the 2012/13 tax year.
And yet there are four HMRC teams that include around 40 IR35 specialists, so we’re not saying that you won’t get investigated. There were 192 IR35 enquiries opened in the most recent tax year, 2013/14. This is way down on peak figures in the years immediately after IR35 was introduced in 1999 that numbered in the thousands.
Even if they do get targeted, contractors can choose to manage the resulting risk of being found inside IR35 during an investigation. Simple steps such as securing contract reviews, creating an IR35 file and taking out tax investigation insurance can ensure that most HMRC investigations are killed by a professional IR35 consultant before they escalate.
So, despite the slim chance of being targeting and even slimmer chance of being found inside IR35 if you are, why should we keep quiet about IR35’s failings?
HMRC’s record of intervening in IR35 cases is poor, particularly when compared to the number of one person limited companies. HMRC can’t determine IR35 status without looking at each case individually and applying complex employment case law. It does not have the resources to check suspected IR35 candidates to that level of detail. And, unlike evaluating compliance with many other taxes, IR35 evaluation simply can’t be automated. All HMRC can do is target contractors its specialists believe are at high risk of being inside IR35.
We all know this, and we think that the taxman knows it too. But the greater fuss we all make about IR35’s failings and how poor HMRC’s success rates are, the greater the chance that someone might take notice. If the wrong person takes notice, we could end up with a piece of horrendous knee-jerk legislation.
This is not idle speculation – the Conservatives have a track record of this type of reaction from their time in Coalition. Remember the disastrous impact of the off-payroll legislation?
The Treasury’s own analysis proved that 94% of public sector contractors were legitimate. Yet major IT programmes were nearly derailed and some contractors were hounded out of their contracts by officious public servants over-interpreting how the rules should be applied.
Perhaps next time we receive updates on how few investigations are being opened and the low number of contractors caught, we should all quietly cheer and celebrate that so many contractors are complaint. If they weren’t, then the tax yield could be much higher, and coming out of contractors’ pockets.
So, let’s not make such a fuss about how IR35 has failed HMRC. The alternative could be much worse.