IR35 comes under fire for its negligible tax take

Figures have been released showing that the IR35 tax regulations are producing an average of just £1.5 million a year in tax revenues.

The disclosure came after the Professional Contractors Group (PCG) used the Freedom of Information rules to request exact sums on the amount of tax raised for the exchequer by IR35.

Between the tax years 2002/03 and 2007/08, IR35 managed £9.2 million in government income, the equivalent to £1.5 million annually.

In itself a very small amount when seen as part of the overall tax take, the figure also falls a long way short of the £220 million a year IR35 was expected to yield in national insurance payments alone, the level predicted by an official assessment made in 1999.

IR35 was introduced the following year as a way of preventing disguised employee arrangements where staff, and employers, could reduce their tax liabilities by assuming a false freelance status.

The PCG said that genuine freelancers and contractors have long regarded the regulations as imposing unworkable tests of their employment status, often forcing them to pay more tax than salaried, permanent employees.

Enforcement of IR35 has also been paltry in its results, the PCG added. Of the 1,468 IR35 investigations PCG has been involved with, HM Revenue and Customs (HMRC) proved additional tax was owed on only six occasions.

John Brazier, the PCG’s managing director, commented: “This revelation confirms our long-held suspicions about IR35. It 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.”

Mr Brazier promised that the PCG would follow the details up with further requests under the Freedom of Information Act.

He continued: “We believe there is more to be uncovered from HMRC. In doing so we will find out the true costs of IR35, and expose the wildly inaccurate premise on which it is based.”

However, the figures released do not include taxes raised through the deterrent effects of IR35 and they do not take account of PAYE tax and NICs generated through the voluntary compliance of umbrella companies.

The PCG had asked HMRC to provide figures on the sums raised through “compliance activity specifically categorised as IR35”.