Responding to a parliamentary written question last month, the Treasury has revealed that the direct tax yield from IR35 investigations remains negligible, but is there more to the figures than meets the eye?
What is the direct tax yield from IR35?
On 14th January 2015, Pamela Nash, the Labour MP for Airdrie and Shotts, asked the Treasury how much it had raised as a result of IR35 investigations in the different UK regions over the past five years.
In response, David Gauke, the Financial Secretary to the Treasury, provided the following figures for each of the last five financial years (although data is not available by region).
- 2009/10 – £155,000
- 2010/11 – £219,000
- 2011/12 – £1.2m
- 2012/13 – £1.1m
- 2013/14 – £430,000
Clearly, the figures show that HMRC collects very little additional tax as a result of its IR35 compliance activities, but Mr Gauke points out that IR35 generates a far higher figure as a result of the deterrent effect of the legislation being in place (particularly as a result of workers using PAYE umbrella companies rather than incorporating).
“In addition to the tax voluntarily paid through IR35, and the compliance revenue the cost to the Exchequer of not having the IR35 legislation would be around £520 million a year.”
It is important to note that the many critics of IR35 contest this indirect tax yield figure, and claim HMRC has never been able to provide any real evidence to back up this claim.
The deterrent effect of IR35
We asked Seb Maley from IR35 experts, Qdos, what his thoughts are on the latest figures. He explained why contractors should continue to be vigilant when it comes to protecting themselves against an IR35 investigation, even though the chances of being selected remain small:
“Alongside the actual yield, HMRC also revealed the number of enquiries carried out in 2013/14 – 192. This is broadly in line with HMRC’s targets for new investigations.
“It’s difficult to know how to read into the yield figure – we know that HMRC are still opening a higher number of enquiries than we’ve seen in previous years. However, the yield in 2011/12 was £1.2m against just 59 enquiries, suggesting HMRC are having far less success in winning cases despite carrying out significantly more investigations. A breakdown of a wins to losses ratio would be very interesting indeed, but sadly we’re never likely to be party to that.
“Also, I would assume that a good proportion of those 192 cases did not conclude in the 2013/14 tax year, meaning the yield would be reported in 2014/15.
“HMRC will (and have) reiterated that IR35 is a key deterrent and the yield from cases and reaffirmed its ‘value’ of £520m a year as part of the recent FOI responses.
The bottom line is that HMRC are clearly still intent on enforcing IR35, and they are still winning cases. Many of our clients have received enquiries in the last two years, and have all been very thankful for the peace of mind that a tax insurance policy provides.”
For further reading, try our recent article – what happens during an IR35 investigation?