IR35 investigations surge to seven-year high

The number of new IR35 investigations into limited company contractors has more than quadrupled since 2011-12, to return the most enquiries in a 12 month-period for seven years, official figures show.

According to fresh data disclosed by HM Revenue & Customs yesterday, it launched 256 IR35 enquiries in the 12 months from April 2012, compared with just 59 in the previous tax year (2011-12).

That means that a greater number of contractors were investigated for IR35 in 2012-13 than in the previous five tax years combined, when a total of 223 enquiries were made under the legislation.

The HMRC data for 2012-13, disclosed to the PSC Committee yesterday, vindicate its claim to Contractor UK last October that it would exceed the target of 230 IR35 probes a year, which it pledged to MPs.

But standing at 256, the total number of IR35 enquiries in 2012-13 is far off the 2,000 enquiries which a trade body’s website claimed were made under the rule in the five months from May of that year.

In fact, previous data from HMRC show that the total yearly volume of IR35 investigations has only broken the 1,000 barrier twice – in 2003-04 (1,166 investigations) and 2002-03 (1,016 investigations).

However the last tax year in which there were a greater number of IR35 enquiries than there were in 2012-13 was in 2005-06, when 656 were launched, down on the 771 in the previous tax year.

That same pattern of IR35 enforcement activity relaxing a year after accelerating appears to be taking shape in this tax year, according to a second HMRC data release to the PSC committee.

Specifically, the number of IR35 investigations in the first six months of 2013-14 stands at 112, Revenue officials told the committee, compared with 193 IR35 investigations at the same period of 2012-13.

Despite the annual dip, the total of 112 recently launched enquiries equates to HMRC opening almost one IR35 investigation every day since the current tax year started.

Robin Wythes, HMRC’s employment status team leader, reflected to Baroness Noakes and her committee: “We’ve opened 112 cases to date in the first six months of the tax year ‘13-14.

“These are all cases that we consider to represent a high risk of IR35… i.e. those companies where, generally, we believe all their contracts of the year would be within IR35.”

His comments chime with what HMRC’s deputy director Rowena Fletcher said was the priority of its four IR35 enforcement teams – targeting PSCs whose every contract is caught by IR35.

However, she also told the committee it would not be “appropriate” for the IR35 teams to have “huge coverage” of the PSC population, even though non-compliance represents a “significant” risk to the exchequer – the same level of risk, she said, as when the rule was introduced in 2000.

Mr Wythes seemed to agree, saying that despite some companies incorporating to avoid or mitigate taxes – the “wilfully non-compliant” - he anticipated that IR35 investigations would, broadly, not exceed 250 a year.

More positively for contractors, the HMRC officials revealed that the average duration of an IR35 enquiry has fallen in this tax year to 28 weeks, down from 110 weeks and 140 weeks in previous years.

As a caveat, Mr Wythes pointed out that most of the IR35 enquiries ending shy of 30 weeks resulted in no tax due (because IR35 was not applicable), but he stressed that HMRC was committed to “dramatically reducing” the investigation time for all firms assessed under the rule.

“Possibly, in truth for the first time, [HMRC is] trying to see IR35 from the view of the worker,” he explained, adding there was a need to make Business Entity Tests – part of the IR35 guidance released last year – “fit for purpose.”

Asked earlier by the committee about how many IR35 investigations were launched in the last full tax year, Mr Wythes stated: “In 2012-13, we’ve opened up 256 enquiries into cases where we believe IR35 is a high risk…these are new enquiries.”

Potentially out of both those and the 112 opened in the current tax year to date, he said there was no “backlog” of IR35 cases, as only five could be called “pending,” in that the taxpayer may capitulate or fight the Revenue at a tribunal.

Editor's Note: Further Reading -

HMRC asks contractors to rate its IR35 reforms

How to Avoid IR35

When clients blur your IR35 status

Contractor IR35 insurance

How to deal with a HMRC IR35 letter

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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