More than half a million UK workers are currently cutting their tax bills by setting up their own limited companies, despite HMRC’s continued attempts to crack down on this practice.
A large proportion of these workers are in breach of IR35, the tax avoidance rule that states workers cannot pay themselves by acting as a ‘disguised employee’.
While many workers are talented flexible individuals who are legitimately billing their employers, there remains a significant number of other workers who are not technically contractors; instead, they have a standard employee role.
These workers are reducing national insurance and income tax contributions by being paid through a limited company. HM Revenue & Customs has stepped up its efforts to catch those breaching the iR35 rules after imposing new penalties and establishing specialist teams to investigate possible breaches; however, it remains a problem.
A member of HMRC’s IR35 forum, Kate Cottrell, said: “According to figures from the Office for National Statistics there are around 300,000 one-person companies in the UK. But many people who set themselves up as a contractor for tax reasons employ their spouse in the company as well, so the number of people taking advantage of this measure could be as high as 600,000.”
She added: “The Revenue is really cracking down in this area. It has committed to investigating 250 new enforcement cases a year, and typically has around 400 active cases at any one time.”