IR35 costs approximately £700,000 each year to administer, yet it generates only £1m a year, despite the efforts of a dedicated 40-strong team of HMRC employees. In its defence for this poor return, HMRC continues to claim that more money is raised because of IR35’s ‘deterrent effect’ stopping contractors using personal service companies.
HMRC revealed these figures in evidence to the House of Lords Select Committee on Personal Service Companies (PSCs) inquiry. The final session for oral evidence took place on 3 February, and saw witnesses from business reinforce that contractors do not want to become employees. They are, in fact, “highly trained and sought after individuals”, according to GlaxoSmithKline’s senior vice president of core business services Bill Louv.
Despite the seemingly meagre return on investment, HMRC’s team leader of the employment status team Robin Wythes said: “Yes I do believe that IR35 had addressed some of the problems it was designed for. My view is that the Friday to Monday example is a clear example of the kind of arrangements that IR35 was designed to tackle.”
Contractors choose to work via PSCs
This evidence session saw further witnesses from industry who reinforced the fact that contractors have chosen to work as they do, via PSCs, and have not been pushed into incorporating.
“We would rather hire somebody as an employee but the worker does not want to become an employee,” said Louv. “We have about 2,000 workers providing services through a PSC, which is about 9% of our total workforce.”
We would rather hire somebody as an employee but the worker does not want to become an employee
Bill Louv, GSK
BT’s human resources director of reward and pensions, Jim McInally, highlighted that contractors are “highly skilled and highly remunerated”, but it is not for clients to be checking their tax status because of “all sorts of confidentiality issues”.
Louv reinforced the fact that “contractors did not want to become employees and wanted to manage the risks and rewards of managing their own business”.
“Exchequer risk” increase from £475m to £550m
HMRC had been recalled to this evidence session with the express intention of answering some of the questions that arose during the first evidence session in November 2013. At that time, HMRC was able to testify that IR35 generated approximately £1m a year directly, with a further ‘exchequer risk’ of £475m.
In its written evidence, that risk rose to £550m, which according to HMRC deputy director with special responsibility for the Employment Status Team, Rowena Fletcher, was due to HMRC updating “some of the assumptions relating to the protection of revenues of employees that might move to set up a PSC if IR35 was removed”.
According to HMRC, £115m of this risk relates to 220,000 directors who pay an additional £500 in tax each because they pay themselves a higher salary, as a result of IR35.
Fletcher said: “We expect 50% of directors to change their behaviours in a way that might be influenced by IR35. If IR35 was removed, these directors would take a more aggressive approach. [They] would take more dividends.”
IR35 costs £700,000 to administer
Fletcher highlighted that there are a large number of both taxpayers and regimes. There is a need to ensure sufficient coverage to police all of the regimes and manage compliance risk. The focus is on encouraging and supporting people to pay the right amount of tax first time.
This was a preamble to confirming that the four teams with forty people, who are part of a broader field force, cost HMRC £700,000 each year. Fletcher said that there is no analysis or allocation of costs to individual pieces of regulation.
She added that it is “inherently difficult to measure the deterrent effect” and that there is “not a direct relationship between the resources invested and the quality of intervention”.
Low level of resources dedicated to IR35
Committee chairman Baroness Noakes noted that the if there are 40 people costing £700,00 a year, this represents less than £20,000 per head, which is a low level of resources dedicated to IR35.
Fletcher responded saying that this was a “rough and ready” figure that takes an average salary across representative grades.
In response to HMRC’s confirming that there are five IR35 cases currently under investigation, one committee member highlighted that this number “seems very low considering the amount of activity”.
At the close of the session, Baroness Noakes confirmed that there would be no further oral evidence sessions, and that the next step would be for the committee to make its recommendations.