Limited company contractors and other small to medium sized enterprises (SMEs), are responsible for nearly half, or £16.5bn, of the 2013-14 Tax Gap. But IR35 gets no mention, despite HMRC’s belief that if the legislation were properly implemented, it would generate £430m in additional tax.
This is according to HMRC’s Measuring Tax Gaps 2015 document, which estimates the difference between what HMRC believes should be paid and what is actually paid in tax. Large businesses make up £9.5bn of the latest Tax Gap estimate of £34bn, individuals account for £2.1bn and criminals £5.1bn.
“Considering IR35 should be generating nearly half a billion pounds of tax each year for the Exchequer but doesn’t, I’m astonished that it gets no mention in this year’s Tax Gap calculations,” notes ContractorCalculator CEO Dave Chaplin.
Despite the tax gap margin dropping from 6.6% in 2012-13 to 6.4% in 2013-13, the overall figure remained at £34bn, reflecting only a very marginal improvement from a Government that has invested so much time and money into clamping down on tax payments.
Nonetheless, Financial Secretary to the Treasury David Gauke was pleased with the outcome: “The UK has one of the lowest tax gaps in the world, and this Government is determined to continue fighting evasion and avoidance wherever it occurs.
“There is understandable anger when individuals or companies are perceived not to be contributing their fair share, but we can reassure the public that the proportion going unpaid is low and this Government is dedicated to bringing it down further.”
Contractors operating under a limited company may not be surprised to find that Corporation Tax is one area in which there has been a substantial decrease. Out of all of the categories, the Corporation Tax gap has witnessed the largest reduction since records began in 2005-06, decreasing by just over a half.
The estimated total Corporation Tax gap for SMEs – the category which contractors’ limited companies fall into – has remained steady at £1.4bn, the same figure as the previous year, making up a 7% proportion of theoretical tax liabilities, a 1% marginal improvement upon 2012-13.
In 2012-13 the proportion of SMEs with incorrect Corporation Tax returns with additional liability totalled 16%, only 5% of which were liable for more than £1,000. In 2005-06 the figures were 41% and 19% respectively.
HMRC has proven effective in dealing this particular area, but with Corporation Tax now accounting for just £3bn and 9% of the overall gap, the taxman may be better suited looking at other areas in which it can effectively recoup lost tax. Notably, Income Tax, National Insurance Contributions, Capital Gains Tax and VAT account for 80% of the overall gap combined.