Adviser bets against Osborne tackling IR35
The taxman’s release late last week of new data on IR35 almost guarantees that the rule will be neither removed nor even referred to in the Budget this week, a status advisory says.
Shown the data, unveiled just four working days before the chancellor speaks, Qdos Consulting said that its advisers would be “very surprised” if IR35 featured again in Wednesday’s Red Book.
“This document reaffirms that the government has no intention of abolishing the legislation,” Qdos’ Seb Maley told ContractorUK.“[So] I would be very surprised if IR35 was mentioned in the Budget.”
His comments are largely due to the document from HM Revenue & Customs stipulating that the government “remains firmly of the view” that the burden of IR35 is justified.
More specifically, the burden is “proportionate when considered against the fiscal risk to the exchequer of those incorporating to disguise employment income.”
The document adds: “HMRC estimates that the annual administrative burden of IR35 is £16m and the cost to the exchequer of abolishing it is £550m.”
But according to Qdos, which runs more than 700 IR35 contract reviews each month, the HMRC data on how it arrives at these two numbers are “questionable to say the least.”
The £550m is reached by taking the total revenue PSC directors would pay themselves without IR35 (£115m); adding it to the sum that employees would deprive the exchequer of without IR35 (£405m), and adding the ‘direct exchequer impact’ (£30m).
Contractor trade body IPSE doesn't think the numbers stack up. It stated: “This figure [£550m] is inaccurate and based on huge assumptions about individual behaviour”.
It is therefore “difficult to rely on,” the body said of the figure or, at worst, is “completely inaccurate”.
The body, known as the Association of Independent Professionals and the Self-Employed, was just as disappointed about the figure of £16m – the apparent cost of IR35 to taxpayers.
According to the Revenue, the figure is reached by “measuring the cost to business that would fall away if the IR35 legislation were abolished overnight.”
But it does not take into account the ‘business as usual’ costs, nor does it cover “one-off or transitional costs of change, the amount of tax paid, HMRC’s own costs of administering IR35, cash flow costs etc.”
It also does not include administrative costs incurred when things don’t work smoothly, for example, when businesses make errors on forms or have to contact HMRC.
Even allowing for these many exclusions, IPSE was still at a loss as to how the figure (specifically £15.8m) can be so low. “This is a wild underestimation,” the association said.
“In 2009, Oxford Economics said the average cost of IR35 admin for a business was [approximately] £850. If you apply this to HMRC's own estimation that it affects 200,000 limited company contractors, this would put the figure at a whopping £170m.”
In fact, the HMRC estimate of almost £16m for IR35’s administrative burden tells “only half the story”, according to the Association of Certified Chartered Accountants (ACCA).
“What it can’t address is the wider costs to other businesses in the chain of the IR35 compliance process,” said the association’s tax technical manager Jason Piper.
“Agencies and end-users will often face an administrative burden of replying to the taxpayer’s requests, while the contractor themselves will often be in limbo until that information is forthcoming.”
Qdos agrees. It said: “Each one [of the 700 reviews we carry out each month] takes up time for the contractor and, often, the recruitment agency or end-user,”
“We also get countless ad-hoc queries and concerns from clients on a daily basis.”
Yet the ACCA’s Mr Piper countered that these “wider costs” of IR35 are “beyond what HMRC has the remit or resources to reasonably investigate.”
Also unlike Mr Maley, who expects IR35 to not even show up in Wednesday’s Budget due to HMRC’s update coming just four days before it, Mr Piper hinted that it might -- and possibly in a detailed way.
He said that now the government has “clearly identified a risk that it wants to addresses,” the issues with IR35 “may mean devoting more time and resource to [its] underlying design.”
Speaking ahead of the Budget, Mr Piper, an IR35 Forum member enforced: “Now is the perfect time for policy designers and administrators to get their heads together and try to address some of…[IR35’s] underlying structural features”.
IPSE is hoping for something else altogether. Its director of policy Simon McVicker said: “Instead of attempting to justify a flawed policy [IR35], we hope HMRC will instead give serious consideration to our sensible proposal for a Freelancer Limited Company.”
Editor’s Note: Related Reading –