HM Revenue & Customs either undersold the Lords on the effectiveness of IR35 by some £75million, or has seen the amount of tax protected by the rule leap by this much in a matter of weeks.
Going before the Lords inquiry into PSCs on Nov 25th, HMRC’s Rowena Fletcher claimed that IR35’s ‘exchequer risk’ was much as it was when the rule took effect, about £475m.
But in a note to supplement her evidence, issued to the Lords this month, HMRC admits that the “current” figure is actually closer to £550m, some 16% higher than Fletcher submitted.
No acknowledgement that its deputy director gave the Lords inaccurate data is made by HMRC. On the contrary, the £475m cited is “in line” with the £550m it has verified, it says.
The department states: “This current estimate [£550m] is in line with the estimates [£475m] we provided to the committee during their evidence session on 25 November.”
Perhaps the fiscal risk which IR35 addresses leapt between Nov and Jan, but it is much more likely that Fletcher, with “special responsibility” for Employment Status at HMRC, erred.
Elsewhere in the note, the Revenue identifies the two elements that go into working out the amount of protection that IR35 provides the Exchequer – the same elements Fletcher drew on.
The first sum (£115m) is the total revenue that PSC contractors would pay themselves, and thereby deprive the Exchequer, in higher dividends and low salaries if IR35 did not exist.
The second sum (£405m) is arrived at based on UK workers that are currently directly employed – such as via an umbrella company – who, if IR35 was absent, would be a PSC.
Adding these two amounts to the £30m from IR35 that the Exchequer yields – the total in tax and NICs received “directly as a result” of the rule – returns the figure of £550m.
“Separately” added HMRC, “we also collect additional compliance yield as a result of uncovering non-compliance with IR35; our latest figure for additional compliance yield is £1.1m for 2012/13.”