Is IR35 regulation worth the hassle?

The tax yield generated through reviews using the UK's controversial intermediaries legislation amounted to around GBP200,000 last year, HM Revenue and Customs has said, figures a leading freelance body says demonstrates that the difficulties caused by the system are 'completely unnecessary'. The legislation, referred to as IR35, was introduced in April 2000, and was designed to combat the avoidance of tax and national insurance contributions (NICs) through the use of intermediaries in circumstances where an individual would otherwise, for tax purposes, be regarded as an employee of the client.

In a report published earlier in the year, the Office for Tax Simplification suggested that reforms, including the merger of the income tax and NIC systems and a reduction in the differential rates applicable to different incomes and legal forms, could remove much of the pressure on the employment and self-employment boundary and should result in the IR35 legislation becoming obsolete.

HMRC recently lost another high profile IR35-related court case, and, according to PCG, the body representing the UK's freelancers, the latest HMRC figures highlight the need to scrap IR35. Responding to a freedom of information request, HMRC revealed the number of IR35 status enquiries it undertook each year, over the past five years. The number of reviews opened by HMRC, where the intermediaries legislation was identified as a risk, is as follows:

2006/2007: 158
2007/2008: 104
2008/2009: 25
2009/2010: 12
2010/2011: 23

HMRC says that the tax yield recovered in relation to these reviews cannot be identified, because a review is not always concluded in the same year that it was opened. However, the tax yield received over the past five years is as follows:

2006/2007: £1.9m
2007/2008: £1.7m
2008/2009: £1.4m
2009/2010: £0.15m
2010/2011: £0.22m

In response to the figures, PCG has again called on the government to explain more clearly why IR35 remains in place. John Brazier, Managing Director of PCG, commented: “These figures confirm what PCG has always said, that the tax yield from IR35 is minimal and that the stress and damage done to the UK’s 1.4 million genuine freelance businesses is completely unnecessary. It also shows us that IR35 is an unwarranted measure introduced by the previous government. Despite the now evident worthlessness of IR35 it remains in place and, as directed in the Budget this year, its administration is being reviewed. PCG is currently working hard with the IR35 Forum to reduce the impact of IR35 but this new data reiterates what PCG has always believed, IR35 should be scrapped."

Chris Bryce, PCG Chairman and IR35 Forum member, added: "I'm not surprised, it's what we've thought all along but I'm amazed, appalled and angry that so many people in the private and public sectors are wasting their valuable time on IR35 if this is all it takes in. Chancellor George Osborne simply must remove this barrier to economic growth and do it as soon as possible. He has a great opportunity in the November statement to release businesses from this ridiculous burden and free up HMRC resource to work on better things." The government issued a call for evidence on the potential merger of income tax and NICs on July 11, and it intends to consult on proposed changes later this year.

Source Tax-News.com