Why IR35 was kept on the statute book

On their own, newly released IR35 data by HM Revenue & Customs indicate that freelancers have a greater chance of winning the lottery than being investigated under the rule, writes IR35 expert Kate Cottrell, of the Office of Tax Simplification, the IR35 Forum and Bauer & Cottrell.

So will the release of the data, which cover a five-year period, come to represent the beginning of the end of IR35? Thanks to the disclosure of the information under freedom of information rules, is IR35’s abolition now all but a sure thing? Unfortunately not. It would be very naïve to think that these figures are news to George Osborne, the chancellor of the exchequer, who this year had the option of removing it but instead decided to retain it, in the very same form that Labour introduced more than a decade ago.

IR35 – What’s the worry?

Hundreds of thousands of people are affected by IR35 and have to consider their IR35 status. With just 322 HMRC IR35 investigations in the last 5 years, the issue is not exactly high up on HMRC’s agenda. Undoubtedly the fear of HMRC investigation encourages some people to seek their accountant’s advice; to have their contracts reviewed, to join membership organisations and even to take out insurance protection. But with IR35 investigation numbers like these there is currently more chance of winning the lottery than getting investigated.

IR35 – Why is it getting all this attention?

As reported by the OTS, many people just ignore IR35 and have done so for years. The advent of a new government gave those that have lobbied for the abolition of IR35 another opportunity to call for its removal. This prompted the OTS review of IR35, and subsequently the chancellor chose to keep it but to review the way it is administered by HMRC. We now have the IR35 Forum working to do just that. IR35 is in the spotlight and has never had so much attention since it began.

IR35 - Why is it still here?

The simple answer is money. It is NOT about the number of cases HMRC has investigated, nor is it about the amount it has yielded for the Treasury. IR35 is a valuable and significant deterrent. Without it there would be nothing to prevent anyone and everyone setting up a limited company and paying themselves in dividends. At the very least it is likely that those in umbrella companies or managed service companies would jump to limited companies. A conservative estimate of the fiscal risk of the latter happening was put at £500million.

IR35 - What does the future hold?

At Bauer & Cottrell we have been telling our clients for years that there are hardly any IR35 investigations. There is currently a very small risk of investigation, but the only way to test the success of any new IR35 administration processes that result from the IR35 Forum, is to carry out a significant number of new investigations/interventions. Hopefully, with the Forum’s work on the identification of those who are clearly outside IR35, we will have some clarity for all freelancers.

Interesting timing

This FOI response has arrived just days ahead of the implementation of the Agency Workers Regulations (AWR). Although the AWR is unrelated to IR35, many agencies are seeking confirmation of contractor’s business status and their IR35 status. Many are being asked to sign a document confirming their status and, if AWR-caught, to confirm that they have paid the appropriate tax under IR35. For the first time it is in the interest of the end-client to properly consider the status of their agency workers. Focus has also been put on the contracts in place so that it is now in the agencies interest to ensure that the upper and lower contracts mirror each other. The advent of the AWR is helpful to confirming outside IR35 status providing of course that the IR35 status is correct in the first place.

IR35 – Changed by the FOI release?

The revelation of these IR35 statistics do show that there has been some very misleading information about IR35 broadcast by some over the years. However they do not alter the fact that IR35 was retained for its deterrent effect or that it is possible that these historical figures will pale into insignificance in the future.

 

29th September 2011

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