HMRC’s IR35, a legislation established in 2000, was intended to reduce tax avoidance by personal service companies where workers receive payments from a client via an intermediary. IR35 has a number of criteria that aim to weed out ‘disguised employees’, or workers whose relationship with the client is such that if they had been paid directly they would have been, for all intents and purposes, employees of the client.

The response detailed in the October FOIA shows that HMRC does not hold any data relating to:

• The number of companies or individuals identified as possible targets for investigation since 2001;
• The total cost of investigations since 2001;
• How many of the investigated individuals paid immediately;
• How many of the investigated individuals entered a time to pay deal with HMRC;
• How many of the investigations resulted in the seizure of property to settle debts or other enforcement; or
• How many investigations were settled early and what discount settlements were received on the alleged total amount owed.

Chris Futcher, CEO of The Pulse Umbrella Group, said: “Genuine contractors are being let down by HMRC on IR35. The amount of information HMRC is failing to collect on IR35 does raise a lot of questions about the business case for it. No one really seems to know the impact it’s having, yet contractors are tying themselves up in knots trying to comply with it.

“IR35 investigations can take years in some cases and can be hugely stressful for contractors who are just trying to get on with a job. The least HMRC should be doing is justifying their actions by identifying what effect this tax legislation is having.”

While HMRC is able to provide figures for the number of reviews they opened from April 2000 to 2011 and the tax yield received from these, they withheld the most recent figures. Under the FOIA, they are able to withhold information if they have an intention to publish at the time of receiving the request, consider it reasonable to withhold the information until the planned publication date and it is not in the public interest to disclose the information. For the same reason, they also withheld the information on how many investigations resulted in a successful outcome.

However, The Pulse Umbrella Group looked at previous FOIA request responses and found the following figures.

The number of reviews HMRC opened in any one year peaked in 2003-2004 with 1,166 being opened. Since then the numbers have fallen dramatically, with 2009-2010 seeing only 12 reviews. But they have begun to increase. 2011-2012 saw 59 reviews opened, although this figure is no longer available from HMRC, and from April to November 2012 193 reviews were opened.

The tax yield recovered from specific reviews cannot be identified as reviews are not always finished in the same year they open. However, the tax yield for the financial years 2010-2011 was £219,180, increasing to £1.25m in 2011-2012.

Futcher continued: “HMRC seems to really be gunning for contractors now, with the numbers of reviews climbing sharply after years of decline. Earlier this year they increased the number of teams working on IR35 from three to four, so we’re no doubt going to see these numbers continue to rise, especially after the furore last year with some prominent organisations being found to be paying many contractors through personal service companies.

“While the basis of IR35 is sensible, it is so complicated that it’s discriminating against people running legitimate businesses. They have to jump through significant hoops to prove that they are not trying to evade tax. Contractors are an important part of the labour market, providing flexibility for businesses.”

By Shané Schutte