IR35

Congratulations to the Professional Contractors Group, who have wheedled out of the Government some interesting statistics on just how ineffective the IR35 legislation is.  In the 2010/11 tax year HMRC opened only 23 investigations into whether IR35 should be operated.  This was up on 2009/10 (12 investigations) but a considerable reduction on 2007/08 (104) and earlier years.  The tax yield from this has gone down too, from £1.9 million in 2006/07 to £219,000 last year.  You can see the details at
http://www.pcg.org.uk/cms/index.php?option=com_content&view=article&id=8118:pcg-calls-for-action-in-light-of-ir35-tax-yield-figures-&catid=861:press-release-archive&Itemid=1361.

When put against the Government’s total tax take and the number of freelance contractors operating through companies, these figures are insignificant.  It makes one wonder what the ‘deterrent effect’ is that the Government says it sees in keeping the legislation on the
books.

It also makes one wonder what is the point of the service company question, which appears on form P35 (the year end PAYE reporting form), and in the employment pages of individuals’ tax returns.  This was inserted into the tax return in 2008 when HMRC was under pressure from Parliament to ‘do something’ about the low yield from IR35 investigations, and it asks what salary and dividends the taxpayer has received from any service companies (not necessarily ones that ought to be operating IR35).

Rest easy – HMRC is clearly not making much use of this information.  It is quite probable that the question is ultra vires anyway.  Keith Gordon, a barrister at Atlas Chambers, reports in his blog(http://www.atlaschambers.com/members/KMG5.php) on a lengthy correspondence that he had with the Revenue on this one, in which he seems to have very effectively tied them up in knots.  This is definitely recommended reading if you want justification for opting out of answering the service company question.

So David Kirk & Co. Ltd’s policy is that we recommend to our clients that they do not answer the service company question, but do explain why they are not answering it, and we prepare tax returns on that basis unless you ask us not to.