The number of IR35 investigations conducted by HMRC in the current tax year has soared, hitting three times the rate for the previous year in the first six months alone.
Research by tax and accountancy group Bloomsbury Professional reveals that 193 new IR35 investigations were opened in the first six months of 2012/2013; the figure for the whole of the preceding year was 59. The surge appears to have followed the political storm that exploded in spring 2012 after media allegations of tax-dodging by senior public sector figures, who were accused of using personal service companies to reduce their tax obligations.
By May, HMRC was promising to change its policing of IR35. According to Bloomsbury Professional, the clampdown bears witness to the Revenue’s increasingly aggressive pursuance of potentially missing taxes as it attempts to meet huge tax yield targets. Bloomsbury Professional’s managing director, Martin Casimir, said: “HMRC has been stung into action by a handful of very high profile cases where individuals and employers may not be IR35 compliant. Ordinary contractors and freelancers are now dealing with the fallout.”
IR35, he went on, shows how outdated the UK tax system is, failing to keep pace with the changing nature of employment by assuming that everyone works in the same job for extended periods.
Mr Casimir did not, however, mention that there is another option for people who want the benefits of flexible working without living in fear of IR35 investigations: working as Umbrella Company Employees. This permits contracting in the public sector but is considered exempt from IR35 by HMRC because all tax and NICs on income are paid up-front on a PAYE basis.