HMRC has finally published its updated assessment of the risk to the Exchequer if IR35 were to be abolished, alongside its assessment of the compliance costs of IR35.
According to ContractorCalculator CEO Dave Chaplin, Estimating the Administrative Burden of IR35 and the cost of abolishing it, promised to the House of Lords Select Committee on Personal Service Companies in July 2015, is based on deeply flawed assumptions.
“HMRC is in massive denial about IR35 and its effectiveness,” warns Chaplin. “The taxman has a piece of legislation that seasoned contractors pay lip service to and that HMRC acknowledges is unenforceable.”
“HMRC then produces highly questionable figures about IR35’s so called deterrent effect, with underlying assumptions that have been shown to be flawed. There is only one reason IR35 stays, and it’s political. In the wake of the anti-tax-avoidance rhetoric, the government, Treasury and HMRC simply cannot afford the political fallout that will arise if IR35 is abolished.
Chaplin points to a survey completed by ContractorCalculator last year that proved the major barrier to highly paid employees incorporating is not IR35, about which many have simply no knowledge.
“Our data shows that it is employers who prevent their employees from incorporating, so the £405m of income tax and National Insurance Contributions (NICs) HMRC estimates are generated by the deterrent effect of IR35 is simply a fantasy.”
Chaplin is also outraged at the naive assumptions that HMRC has used to calculate the cost to contractors of complying with IR35: “Only contractor accountants have been factored into the mix.
“What about the huge opportunity cost to contractors of spending time on IR35 compliance when they should be generating income for their business and UK plc? Contractors have to invest time and money in getting contracts IR35 compliant.
“Then because of the absurdities of the legislation, they must continue to actively manage their client relationship and evidence gather throughout the contract just in case they get investigated. This is an unnecessary burden on the flexible workforce and small businesses.”
Chaplin notes that HMRC has also ignored the IR35 consultancy sector that is discrete from accountants and where contract reviews and negotiations cost significant sums, as well as the cost of specialist IR35 tax investigation insurance.
Chaplin concludes: “It is entirely possible that HMRC is paying lip service to the government by telling ministers what they want to hear. The recent IR35 compliance yield figures show a dramatic drop off during the period when HMRC’s IR35 specialist teams were supposed to be upping their game.”