The Professional Contractors' Group (PCG) managed to obtain figures for how much tax is generated by the IR35 law through a freedom of information (FOI) request, and has said that the low tax take proves the law has been a failure.
HM Revenue and Customs (HMRC), though, has told OUT-LAW.COM that the relatively small tax take is evidence that the law has steered potential tax avoiders away from using what it sees as a loophole.
IR35 was introduced in 1999 to stop individuals who effectively had an employment relationship with a company from setting up companies through which to provide their services and thus avoid paying tax and National Insurance contributions at employee levels.
The PCG has opposed the law, claiming that it is too complex to work properly and that it distorts the relationship between IT contractors and clients.
The body has now discovered that between the tax years of 2002/03 and 2007/08 IR35 generated £9.2 million in revenue for HMRC, which it says is a very small sum.
"This equates to an average of around only £1.5m per tax year – a tiny sum in Governmental terms," said a PCG statement. "The initial regulatory impact assessment for IR35 in 1999 stated that HMRC expected the measure to generate £220m per year in National Insurance contributions alone, thus demonstrating IR35 has not lived up to the Government’s expectations."
HMRC, though, says that the fact that the law is generating relatively small sums shows that it has steered contractors away from attempting to gain tax benefits from acting through a company when effectively they were employees.
"[The data] does not take into account revenue from voluntary compliance where taxpayers identify that the legislation applies and pay the appropriate amount of tax and National Insurance, or the deterrent effect where those who might otherwise disguise employment income through the use of an intermediary decide not to because of the presence of this legislation," said an HMRC statement.
IR35 is named after the name of the Inland Revenue press release which announced it. It is actually a part of Chapter 8 of the Income Tax (Earnings and Pensions) Act of 2003.
The rules apply when there is, by a series of tests, an employment relationship between a contractor and a client. The tests effectively ignore any limited company set up in between those two parties to decide if the relationship is essentially one of employment.
If it is, then the contractor is expected to pay tax and National Insurance contributions at levels demanded from normal employees.
"[The rules were] introduced to counter the avoidance of employed levels of tax and National Insurance by individuals providing their services through intermediaries, most commonly limited companies," said HMRC. "The legislation ensures that where individuals are working under terms and conditions that would have been considered to be that of employment had it not been for the use of an intermediary, they pay broadly the same amount of tax and National Insurance Contributions as a direct employee."
"This revelation confirms our long-held suspicions about IR35,” said PCG’s managing director John Brazier. “IR35 makes very little money for the Government, and given the cost of enforcing it, and the number of failed investigations for HMRC, it may even cost more to implement than it actually brings in. This is a ludicrous state of affairs. IR35 restricts the flexibility of the labour market and is difficult to enforce. It should be abolished at the earliest opportunity."
The High Court last year ruled that a contractor who had worked for motoring organisation AA for three years almost exclusively could not avoid paying tax and National Insurance contributions at employee levels for that period.
Jon Bessell was 50% owner and sole director of Dragonfly Consulting, and was ordered to pay £99,000 in tax and National Insurance contributions.
Bessell is an IT systems tester and The High Court found that his relationship with AA was essentially that of an employee and employer.
Mr Justice Henderson found that Bessell's work could not be substituted for another's; that the control, appraisal and assessment of his work undertaken by AA manager's was like that undertaken in relation to an employee; that the parties' view of what they wanted the status to be was indeed irrelevant; and that Bessell fell "on the employment side" of the dividing line between employee and non-employee.
