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The increased activity came at a time when the Government was under considerable attack for allowing some of its senior public sector workers, such as head of Students Loan Company, Ed Lester, to operate through their own limited companies, which were seen as a means of avoiding tax and NICs. The Government promised to clean up its own Whitehall act and bring private sector companies in line too.
Fears that this would lead to a more focused attack on freelancers through IR35 seem to be justified as speciailist publisher Bloombury Professional revealed figures it had received under a freedom of information request.
They showed that IR35 investigations into freelancers more than doubled last year from 23 to 59; and the tax yield from IR35 cases rose fivefold to £1.25 million in 2011-12 from £219,000 the previous year.
Martin Casimir, managing director of Bloomsbury Professional, said: “It looks like HMRC has been playing catch-up on IR35 in the past year. They’ve gone from almost ignoring IR35 breaches to getting tough around the time that the public sector personal service company scandal began to break."
Toughening up
It is already known that HMRC has strengthen the specialist teams that investigate IR35 cases and has confirmed that it will increase it further in the next 12 months. Through the IR35 Forum, there has been the introduction of the controversial business tests which are now the foundation on which freelancers can assess their risk of being targeted by an IR35 investigation. The Government has said it intends to use these tests when it conducts business with freelancers who will be expected to demonstrate their tax status when they contract with the public sector.
And last week, Chief Secretary to the Treasury, Danny Alexander, told the LibDem conference that he intends to take action against companies who contract with Government but who do not 'play by the Government's rules'. He said: "In the summer, I shut down the scandalous situation where thousands of public sector workers were being paid in a way that potentially allowed them to pay too little tax. Rules are now in place to stop that happening – based on the simple principle that if you’re being paid public money, you should pay your taxes." (See: Firms warned to play by the Government's rules - Sept 2012, Shout99)
It is widely known that HMRC and the Treasury have been looking closely at a number of areas where they perceive tax take can be increased through cracking down on tax avoidance activities. Now, the evidence suggests that HMRC is actively backing up their political masters demands for a tightening up in freelancers and contractors who operate through the so-called 'personal service companies'.
Big picture
Based on information received from a number of sources, the full picture on IR35 investigations and yield now looks like this:
Investigations opened...
2000/2001...........16
2001/2002..........261
2002/2003........1,016
2003/2004........1,166
2004/2005..........771
2005/2006..........656
2006/2007..........158
2007/2008..........104
2008/2009...........25
2009/2010...........12
2010/2011...........23
2011/2012...........59
Tax yield from IR35 investigations in...
2000/2001.............nil
2001/2002.............nil
2002/2003..........£946,275
2003/2004........£1,973,851
2004/2005........£1,447,796
2005/2006........£2,316,351
2006/2007........£1,906,619
2007/2008........£1,730,640
2008/2009....... £1,430,358
2009/2010..........£155,502
2010/2011..........£219,180
2011/2012........£1,250,000
NB: The tax yield recovered in each year is not in line with the number of enquiries opened in the corresponding year, as investigations might begin in one year and conclude with tax yield being accrued in another year. (See also: IR35's investigations and yield in first decade - Shout99, Oct 2011).
Shout99 has a dedicated news area for comprehensive coverage of IR35 policy, Government and HMRC initiatives and legal cases, see Shout99's News on IR35 section. You can also sign up for free email alert when new articles appear in this section.
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Susie Hughes © Shout99 2012
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