In response to a recommendation from the House of Lords Select Committee on Personal Service Companies in 2014, HMRC published a report which claims that abolishing IR35 would prove far too costly to the exchequer than continuing to operate it.
According to the report ‘Estimating the Administrative Burden of IR35 and the cost of abolishing it’ published on March 12, scrapping IR35 will create a fiscal risk of a massive £550m to the public purse, while continuing to operate it will only incur a proportionately lower administrative cost of £16m.
First introduced in 1999 as part of that year’s Budget, IR35 is the government’s anti-avoidance legislation designed to stop people in ‘disguised employment’ from using personal service or limited companies to avoid paying tax and NICs.
IR35, in recent years, has been in the news for all the wrong reasons. In 2012, there was public and political outrage after it was disclosed that 2,000 senior office holders of public bodies were receiving payment 'off-payroll'. That same year, the then BBC finance chief, Zarin Patel, admitted that 148 of its 467 presenters – nearly a third - were paid ‘off the books’.
The estimates are based on the information gleaned from the employer end of year return (formerly P35) from 2010-11 which suggests 6,000 people operated through a personal service company and applied IR35. According to HMRC the direct revenue cost of this was £30m.
HMRC has broken down the cost of abolishing IR35 into two distinct components:
- Direct costing
The direct cost, put at around £30m, is the ‘difference between tax paid on salary taken from the company where IR35 applies and tax that would be payable if the individual adopted the most tax efficient remuneration strategy in the absence of IR35.
- Behavioural costing
This is further split into 2 parts:
a) Behaviour of directors
HMRC profiled ‘current directors with both employment income and dividend income who extract 50% or more of their income as dividends. It assumed that 40% of them would change their behaviour in the absence of IR35, giving a population of approximately 220,000 directors.’
b) Behaviour of employees
With regards to employees, HMRC assumed that ‘4% of all current employees earning above £50,000 would incorporate in the absence of IR35, giving a population of approximately 55,000 individuals.’
Based on these figures, HMRC purposefully found out that a revenue of £115m would be at risk from directors and £405m through employees; a total of £520m.
Including the direct cost of £30m, HMRC assessed that it would lose £550m if the rule was done away with. With regards to the administrative cost of £16m, HMRC claims that £15.8m are generated in understanding the IR35 legislation and figuring out if it applies. The remaining £200,000 are incurred in working out the deemed payment.
In its consultation document, HMRC said, "The government remains firmly of the view that the administrative burden of IR35 is proportionate when considered against the fiscal risk to the Exchequer of those incorporating to disguise employment income. HMRC has done significant work in recent years to improve the administration of IR35, in particular by working with stakeholders on the IR35 Forum.”