Revenue’s IR35 case yield up by 100%

The taxman’s average yield per IR35 case, where a contractor is deemed a ‘disguised employee,’ has soared by 100%, a new freedom of information response by HM Revenue & Customs reveals.

By releasing fresh internal data, HMRC showed that while IR35 netted an average of only £1,700 per case up until 2006, its haul leapt to £17,000 per case over the five tax years to 2011.

The Revenue’s improved yield reflects better targeting. Since its debut in 2000 and until April 2006, IR35 brought in £6.7m from a total of 3,886 cases. For the tax years from 2006-11, by contrast, it took just 332 cases to return £5.4m.

Only the data covering IR35’s first six years were released under the latest FoI request, filed by PCG, following an earlier request for annual yield and case numbers covering the past five years.

That initial release, also under freedom of information rules, showed IR35 to have a paltry yield of £220,000 in the last tax year (2010-11), prompting the contractor group to denounce the rule as “worthless.”

Last night a chartered accountant agreed, saying that, even when factoring in HMRC’s latest and complete dataset on IR35, the yield still appears “shockingly low.” 

Paul Spindler, partner in the technology group at Kingston Smith explained: “Over a 10-year period, approximately £13million has been recovered at an average of about £3,500 per enquiry.

“I expect that many of these enquires [under IR35] have resulted in no recovery [of employment taxes whatsoever].”

He reminded that HMRC has shared only a “snippet” of the full IR35 picture; as the FoI releases make no mention of the many taxpayers, notably umbrella company contractors, who apply PAYE due to the legislation.  

And it is this full picture of IR35 that contractors are ultimately after.

“It’s important that PCG establishes all the facts surrounding the impact of IR35, from its inception in 2000 right up to the present day,” a group spokesman said yesterday, when asked about the figures.

One indisputable fact borne out by the data, offered IR35 expert Kate Cottrell, seconded by the government for the OTS Review of IR35, is that HMRC ‘clearly got better at IR35.’

“It collected an average of approximately £1,720 per IR35 case up to April 2006 and an average of approximately £16,900 per IR35 case between 2006 and April 2011,” she said.

“[In addition] HMRC deployed a lot less effort, as they worked only 322 cases [during the past five tax years of IR35] as opposed to 3,886 [during its initial six tax years].”

But in a nod to the size of the PAYE umbrella community, the advisor says the “deterrent effect” of IR35 is what yields the most revenue for the Treasury.

Another specialist on the legislation, Qdos, agreed, arguing that IR35’s role as a deterrent is a “key point” that gets overlooked when arguing the rule is “useless.”

Though for Mr Spindler, the figures suggest “it’s time for HMRC to seriously consider alternatives” to IR35 particularly, he believes, as the large amount of resources it demands is unlikely to be proportionate to its “small” yield.

However, having been the devil they know for more than a decade, some contract workers might hope the status quo remains, or at least looks recognisable once the IR35 Forum concludes.

“A lot of people [are] effectively abusing the system; we see it regularly – doctors, teachers, TV presenters, all working through limited companies when they are clearly working like employees,” said Qdos’s Seb Maley.

“[But] for an IT contractor operating as a genuine business, it doesn’t take much work to significantly improve their IR35 position.”

Indeed, taxpayers being better educated on how to operate outside of IR35 may partly explain why case numbers dramatically declined, according to HMRC’s figures (reproduced below), since 2008.

Alternative payment arrangements and HMRC’s switch of focus, towards the construction industry and then high risk issues, also brought case numbers down, the advisors believe, although HMRC pointed out that reviews did not always conclude in the same year in which they were opened.