The IR35 Forum is starting to make real progress, so contractors should start worrying. That’s because it will mean a greater HMRC focus on compliance. Here’s why:
More people are choosing or being forced into temporary working and self-employment because of the recession. That’s a fact, borne out by recent research by PCG and Kingston University, as well as the recent release of employment figures by the Office for National Statistics. The former shows a growing contractor and freelancing workforce that’s increased by 12% over the last three years. The latter recorded the highest ever number of self-employed workers in the third quarter of 2011.
Unemployment and changing patterns of work, mostly away from Pay as You Earn (PAYE) style employment into contracting and temporary self employment, together with economic contraction, has significantly reduced tax revenues, such as income tax, National Insurance Contributions, duties, VAT and corporation tax.
Early indications suggest that the Agency Workers Regulations (AWR) have predictably resulted in clients seeking to hire flexible workers via limited companies, outside of IR35. It is likely that this trend of ‘encouraging’ workers to become business undertakings will increase, further reducing the government’s dependable PAYE income tax and NICs receipts.
ContractorCalculator’s recent Freedom of Information (FOI) request demonstrates that IR35 actually makes rather more money for the Exchequer than previous models might have suggested. Possibly as much as £200m more, and that does not include the income tax and NICs collected by umbrella companies; and based on estimates by the five largest umbrellas, which between them employ around 50,000 contractors, that amounts to over half a billion pounds each year.
Previous FOI requests by PCG and others show that the number of IR35 reviews opened by HMRC has fallen to historic lows in recent years, with our data showing that the number of contractors ‘self-certifying’ as inside IR35 remaining stable over the same period. That suggests contractors are largely self-policing themselves into paying salaries/deemed payments or working via umbrella companies, and the need for HMRC to use IR35 as a stick is reduced.
Finally, we have the last two sets of minutes from IR35 Forum meetings showing HMRC suddenly appearing to be very cooperative. The minutes also show that it plans to operate things much more smoothly, and is busily hoovering-up as much intelligence as it can on contractors and contracting from IR35 Forum members and other contributors to it.
In summary, this combination of factors gives us:
- More people choosing forms of work that are not employment, some of which will inevitably be false self-employment
- Falling tax revenues, partly resulting from there being fewer employees, and a desperate need to redress this
- A piece of tax legislation, IR35, designed to tackle false self-employment, which has been shown to work
- A group dedicated to improving how well IR35 is applied.
What’s the likely outcome?
Increased and much more effective compliance activity by HMRC.