According to figures released by HM Revenue & Customs (HMRC), removing the IR35 legislation would, in monetary terms, hit taxpayers harder than administering the regime.
The cost of continuing to operate IR35 is estimated at £16m a year, while the cost of abolishing the legislation is estimated at £550m annually. IR35 has always been a contentious piece of legislation, creating a public outcry in 2012 when 2,000 senior public body office holders were described as receiving payments that hadn’t been included in a payroll. Further problems were caused when it was later disclosed that a number of TV presenters from the BBC had been paid off payroll.
The IR35 legislation was introduced to stop people from working as disguised employees, therefore lowering their tax bill. The cost of abolishing IR35 has been calculated using behavioural and direct costs to the Exchequer. The direct cost is the difference between the tax not paid by those who seek to reduce payment of duty by working through a third party, and the tax which would be collected if the person was treated as an employee. It is estimated that the direct cost to the Exchequer is £30m.
The behavioural aspect is calculated by looking at the behaviours of employees and directors in the absence of IR35 legislation. HMRC studied the profiles of directors who take remuneration of dividends and salary, with more than half taken as dividends. If the IR35 legislation was removed, it is assumed that 40 per cent – about 220,000 directors – would change their behaviour. Without IR35, it is assumed by HMRC that four per cent of employees earning more than £50,000 would incorporate, resulting in around 55,000 individuals. The total tax at risk was therefore estimated to be £520m.
According to HMRC, the organisation has worked hard with stakeholders to improve the administration of IR35 over the years. HMRC states that the majority of the administration costs are generated when trying to work out whether IR35 applies or not.
How could IR35 affect you?
If you are providing services to a client through a third party, usually by operating through a limited company, you could be deemed to be an employee rather than a self employed contractor. If HMRC decides that you should be treated as an employee, you could have to make a deemed payment. This can be backdated for up to six years.
IR35 is a complex piece of legislation that prevents people from avoiding payment of PAYE tax and National Insurance. If you aren’t sure whether you fall within IR35 or not, call one of our advisors on 020 3355 4047, or learn more about online accounting for contractors.
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