Freelancers' Group Exposes UK's 'Pitiful' Tax Take From IR35

by Robert Lee, Tax-News.com, London

25 May 2009

An investigation by the Professional Contractors Group, the association that represents freelance workers and contractors in the UK, has concluded that enforcement of the controversial IR35 tax regulations may actually be costing more than the tax revenues obtained.

Introduced in 1999 as an anti-avoidance measure, IR35 seeks to deny that freelance contractors are genuinely in business and to tax them as employees without establishing a proper employment relationship. But following a request under the Freedom of Information Act to HM Revenue and Customs (HMRC) the PCG found that between tax years 2002/03 and 2007/08, IR35 directly raised just GBP9.2m, or an average of just GBP1.5m per tax year.

These results pale into insignificance compared with the initial regulatory impact assessment for IR35 in 1999, which predicted that the measure would generate GBP220m per year in National Insurance contributions alone, the PCG said.

“This revelation confirms our long-held suspicions about IR35,” commented 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 PCG says that the extraordinary complexity of IR35 makes it almost impossible for contractors to assess whether they fall within it or not, and in some cases their status may rest on contracts they have never seen. Often, some freelancers and contractors end up paying more tax than a salaried employee as a result of the regulations, the association notes.

The PCG claims that of the 1,468 IR35 investigations it has been involved with, HMRC proved additional tax was owed just six times.

“We intend to follow this information up with further Freedom of Information Act requests, as we believe there is more to be uncovered from HMRC,” added Brazier. “In doing so we will find out the true costs of IR35, and expose the wildly inaccurate premise on which it is based. PCG now has an even stronger case to make for IR35’s abolition, which politicians of all parties cannot fail to ignore.”

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