Five months after its formation, this April, the House of Lords Select Committee published 16 recommendations relating to the use of personal limited companies.
In one of its key recommendations, the Committee asked the Government to provide ‘a detailed assessment of the current Exchequer protection figure and of the costs that taxpayers incur in dealing with IR35.’
The figures, it said, would help enable a clearer assessment of whether or not the IR35 legislation ‘is having the intended effect and is proportionate.’
This week, in an annex to its response to the Lords’ conclusions, the Government has provided assumptions and calculations which show the direct, and indirect costs of abolishing IR35.
The revenue which can be directly attributed to IR35 enforcement – tax revenue raised from the 6,000 individuals who openly state that they are operating within IR35, is a mere £30m per year (according to 2010-11 figures).
Of course, it is the deterrent effect of IR35 which has always been cited as the biggest revenue earner for HMRC. In its response, the Government splits its ‘behavioural costing’ between directors of personal service companies, and employees.
When it comes to directors, the Government believes that 40% of directors would change their behaviour if IR35 was abolished. In other words, directors would be more likely to pay themselves the very smallest salaries, and extract the maximum amount available by way of dividends (which are not subject to National Insurance Contributions).
This, the Government says, will cost the Exchequer £115m per year, thanks to assumptions made by ‘operational experts’ at HMRC.
The same experts believe that 4% of employees on £50,000 or more per year would decide to incorporate should IR35 be abolished, rather than working via umbrella companies, or as permanent employees.
This 4% of the UK’s total ’employed’ population equals around 55,000 individuals.
The cost to the Exchequer of these individuals incorporation equates to £405m per year.
So, to summarise, according to the Government’s own data, the total tax loss to the Treasury would be around £550m if IR35 were abolished.
1. The direct tax take from people ‘within’ IR35 (£30m)
2. The estimated cost should directors pay themselves higher dividends in the absence of IR35 (£115m)
3. The estimated cost should 4% of employees set up their own companies in the absence of IR35 (£405m)
You can download the full Government response, and IR35 figures here (in PDF format).
Clearly, the Government has no plans to make changes to the present IR35 regime, so reaction to the report has been decidedly mixed.
Commenting on the Government’s justification of the ‘£550m figure’, Andy Chamberlain, Senior Public Affairs Manager at PCG, said: “The calculation they have offered in this response is extremely crude and is based on a series of assumptions. Based on this response it must be assumed that HMRC have no idea how much revenue is protected by IR35, which is particularly alarming given that it uses this figure as the sole justification for keeping it in place.”
Rob Crossland, chief executive of the Optionis Group (the parent company of Parasol, and ClearSky Accounting) greeted the ‘formal’ response to the House of Lords recommendations, and said that the Government’s position on IR35 “now seems fairly clear and consistent,” albeit with the promise of further improvements to the administration and enforcement of IR35.
Crossland said that the prospect of new legislation would be unwelcome at this stage, and said that “a degree of stability is very helpful”
Julia Kermode, chief executive of the FCSA, also welcomed “clear consistency in the message of compliance”, and the lack of any impending new legislation.