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IR35 Testing

IR35 Odds - The chances of being caught are about 60,000 to 1

Contractors are almost dead-cert winners of any IR35 race against HMRC as long as they stay on form. And statistically, assuming they maintain their form and have the appropriate insurances in place, contractors are actually more likely to find a priceless object in their attic that is then discovered on the Antiques Roadshow than they are to lose an IR35 case against the taxman.

Admittedly, our calculations are pretty crude, but that makes them even more compelling. Imagine how they would look with a more detailed statistical analysis?

Let’s look at the odds and your chances:

Stage 1: Get found - 250 in 300,000

Firstly, HMRC has to find you. Even with the sophisticated data-mining techniques at its disposal, the taxman has recently had to rely on contractors being shopped by their clients, as is now happening in the public and financial sectors. They are currently opening 250 investigations per year, against an estimated population of circa 300,000 limited company contractors. The odds of being targeted: 250 in 300,000

Stage 2: Case remains open - 60 out of 100

Then, assuming you have investigation insurance (which costs less than a round of drinks a month), the chances of your case being closed quickly are strong. Even if HMRC does open an IR35 case file on you, only 60% of those few cases opened stay opened

Stage 3: Case goes to tribunal - 5 out of 150

If HMRC wants to make an example of you, it can then take you to a tribunal. It will need an extremely strong case to avoid humiliation. Your insurance-covered professional adviser may even insist that your case be examined by a tax tribunal. Your chances of closing the case before a tribunal are good. Recent history suggests that only about five IR35 reviews out of 150 go to tribunal

Stage 4: Company paying back the tax - almost zero

OK, let’s say the worst happens and HMRC wins the tribunal. Although the Treasury’s propaganda claims it wins 80% of tax avoidance cases, this is not true for IR35. The success rate is two orders of magnitude lower for IR35 cases. If HMRC actually wins, your limited company foots the bill. But chances are, you’ve already legitimately paid out the cash in your business as dividends. Therefore the chances of your company having funds to pay any back taxes, penalties and interest are likely to be zero.

Stage 5: Being pursued personally for the tax - almost zero

It is possible that HMRC could go after the directors of a business for unpaid taxes according to a variety of tax and National Insurance laws. This is an unusual and tortuous route for HMRC to take and, so far, it has not happened in any IR35 case. The chances of you being pursued personally for any back taxes, based on current history, are zero, or as close as.

And the chances of all that together....

Putting aside the fact that stages 4 and 5 are zero, the chances of stages 1, 2 and 3 happening are roughly: [250/300,000] x [60/100] x [5/150] = 1 in 60,000. To put this into context, the chance of finding a priceless antique on the Antiques Roadshow is roughly 1 in 60,000.

What can we conclude from this? That there is about the same chance of you finding a priceless heirloom than a tribunal ruling against you for IR35. And, even if the tribunal finds against you, the chances of having to pay any additional tax is close to zero.

In other words, the so-called ‘deterrent effect’ we have heard so much about from HMRC when it tries to justify the ‘Exchequer impact’ of IR35 comes down to this: a 1 in 60,000 chance.

But do please consider this warning - despite the low odds of being investigated, the costs of the professional services to defend against an investigation are likely to be much higher than any back taxes, interest and fines imposed by HMRC. But you can also insure against those as well with tax investigation insurance - which every smart company owner, even non-contractors, purchase each year for around £100-£150.

HMRC would have better odds of plugging the Exchequer’s perceived IR35 tax-take deficit if George Osborne were to spend a few hours rummaging around in his attic in the hope of finding a priceless antique.

Published: 29 July 2014

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