HMRC finds it hard to police IR35 Compliance

Despite a six-fold increase in IR35 investigations during the first half of this tax year, HM Revenue and Customs has failed to turn up any compliance failures by contractors, according to data obtained by tax and accounting group Bloomsbury Professional. HMRC ramped up its investigation into "disguised employment" after it was alleged that a number of senior public sector figures had illegitimately received income through personal services companies to avoid liability to personal income taxes and national insurance contributions.

During the first six months of the tax year, 193 new investigations were launched but these have yet to yield a single penny for the tax man. This is despite a massive hike in enforcement activity, up from 59 investigations for the full tax year 2011/12. Martin Casimir, Managing Director at Bloomsbury Professional, commented: “HMRC has been stung into action by a handful of very high-profile cases where individuals and employers may not be IR35 compliant. Ordinary contractors and freelancers are now dealing with the fallout.”

“IR35 is a very problematic piece of legislation as it adds unnecessary complication to the tax system and makes it hard for ordinary contractors to work out their tax bills; It is very easy to fall foul of the legislation. Now ordinary freelancers and contractors have the added complication of HMRC breathing even more closely down the back of their necks.” He continued: “It is a common misconception that people only use personal service companies to avoid tax. For some individuals with more than one employer or for those working on a temporary basis, registering as a personal service company is a legitimate way to work. IR35 is a good example of how out-of-date the UK tax system is. It doesn’t take into account the changing face of employment and assumes that all taxpayers work in the same job for a long period of time.”

IR35 is a complex regulation that makes a contractor's life painful but that, until now, has not proven to be effective. Things can obviously change, and care should be taken to do things by the book. But it does not look like change is imminent...