IR35 estimates could be based on flawed assumptions
The long awaited update to HMRC’s assessment of the potential risk to the Exchequer posed by the potential abolition of IR35 has been published this week. It has also revealed the results of its investigation into the compliance costs of IR35.
Dave Chaplin, the CEO of Contractor Calculator has expressed concern that both of the reports which were promised to the House of Commons select committee on the use of Personal Service Companies has based their information on some seriously flawed assumptions. Mr Chaplin believes that HMRC is in ‘massive denial’ about the overall effectiveness of IR35, characterising it as an unenforceable piece of legislation that experienced contractors only pay lip-service to in order to remain compliant.
The fact that the figures which supposedly show that IR35 is a financial necessity can be shown to be based on flawed assumptions just adds to the belief that HMRC are trying to create a deterrent effect to justify the continued application of the legislation. Mr Chaplin believes that the only reason the department are so set on keeping IR35 in place is as a political gambit to demonstrate the government’s commitment to reducing the level of tax avoidance.
A survey conducted amongst contractors last year showed that the main reason that employees in higher-paid positions do not decide to incorporate was nothing to do with IR35, not least because they knew nothing about the legislation. The survey showed that it was employers who were actually trying to prevent their employees from making the move to incorporation. This suggests that HMRC’s insistence that deterrent effect of IR35 was the only thing preventing a £405 million reduction in the amount of income tax and National Insurance Contribution is hugely flawed.
HMRC has been criticised as being naïve for the figures they have given as those used to calculate the cost to contractors of IR35 compliance. In those figures, only contractor accountants have been counted as an outlay, when the real costs includes the time that contractors have to spend dealing with the admin involved which could otherwise have been spent on income generation.
IR35 has always been a hugely controversial solution to the problem of ensuring that contractors are paying tax at the correct level, however the mounting evidence to suggest that it is going to become increasingly irrelevant is being welcomed by contractors as a sign that their message is getting through.
If you are a contractor or considering becoming one, then our guide to IR35 is a valuable resource to ensure that you understand the legislation and what it means for you. If you want to know the ins and out of what your take home pay could be or how to organise your business if you choose to operate as a limited company, then using a specialist contractor accountant could really help you to understand your finances and get them all in order.
To speak to one of our friendly accountants about how we could help you maximise your profits and save time on your taxes, give us a call today on 01442 275789 or email firstname.lastname@example.org.