The Number of IR35 Investigations Increases Threefold!

Contractors Watch Out! The Number of IR35 Investigations Increases Threefold!

The number of new IR35 investigations rose threefold in the first seven months of tax year beginning April 2012, reaching 193 new investigations.

What does HMRC plan for the new tax year – will the first seven months of the current tax year see another rise in investigations? Given the staffing and resources necessary to crackdown on suspected tax fraud and evasion, for HMRC, suspected IR35 abuses are a nice easy target to meet internal quotas. With 193 new investigations into IR35 opened since April 2012 – three times as many as the 59 similar investigations HMRC opened in the whole of the previous year according to a recent study – it is as well for freelancers and contractors to be certain that their contracts and tax affairs would stand up to closer scrutiny.

Overview of IR35

IR35 allows government to scrutinise the contracts, submitted tax returns or business accounts of freelancers and contractors on the grounds that they may be using "personal service companies" while actually working as "disguised employees" for their clients. The legislation, designed to prevent freelancers paying lower tax rates and national insurance on earnings, allows HMRC to make freelancers prove they are not disguised employees of their clients.

The legislation was refined and the Business Entity Test (BET) swiftly brought in following media revelations in spring 2012 that senior figures of public sector organisations including the BBC and the Department of Health were working through "personal service companies" allegedly in order that they would have a lower tax bill.

In typical UK government style, the proverbial nut was crushed using the largest hammer possible when HMRC announced swiftly in May 2012 the changes they would implement to police IR35. The new legislation, implemented largely to quell public outrage that a handful of highly paid individuals were avoiding tax, as usual, represents a net that catches even the innocent. Perfectly compliant freelancers and contractors are now dealing with the fallout.

Avoiding IR35

Despite HMRC’s crackdown, of the 193 investigations carried out in the first seven months of 2012, none revealed any compliance failures.

DNS know that IR35 is problematic legislation. We are aware that it adds to the complexity of an already convoluted tax system. We sympathise that it can make compliancy for contractors a subject they would rather avoid.

IR35 can snare you and then bite you like a dog

DO NOT put your head in the sand over IR35. It is unacceptably easy to fall foul of this legislation. Take the DNS Business Entity Test TODAY; you will receive your score within minutes.

What you should do:

1. Do the DNS Business Entity Test
2. Check your score and act on it
3. Get in touch immediately if your score indicates that you should do so
4. Make sure you tax investigation cover is up to date.

The number of IR35 investigations HMRC undertook in 2012 probably does not represent the number they plan to carry out in the new tax year. The chancellor’s Spring Budget statement should have alerted us all to the fact that HMRC, on behalf of government, is in aggressive pursuit of all unpaid taxes to bring down the UK’s massive deficit.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.