IR35 Update

Since it was introduced back in the year 2000, the way that IR35 has operated and been enforced by HMRC has been unpredictable. When the legislation was first introduced, the number of enquiries carried out by the Revenue was substantial, making IR35 a significant tax yield for HMRC. However, over the last few years the number of enquiries declined, making contractors themselves far less concerned about IR35 and the potential consequences.

It was during this time that contractors assumed that IR35 was dropping off the map, and looking at evidence given to a House of Lords Select Committee by HMRC, this isn’t surprising, with the rapid decline in enquiries from 2008-2012 made very clear. Between April 2006 and April 2007 there were 158 cases, but this dropped to just 23 in the year ended April 2011.

Despite this lull in activity, the Revenue injected new life into the legislation, promising a ‘crackdown’ on contractor tax avoidance, resulting in a staggering 256 enquiries opened in 2012-13 alone. And what was the reason for this dramatic rise in enquiries? Well, there has been significant opposition to IR35 since it was brought in, and the surprisingly low number of enquiries and small tax yield as seen in the past few years only reinforced the fact that IR35 may not have been the right route of enforcement from HMRC.

During this time the government faced strong calls for IR35 to be scrapped completely, but as we now know, this wasn’t to be the case. It was revealed in the budget on 23^rd March 2011 that IR35 would remain in place, as, ‘abolition would put substantial revenue at risk’.

Since the news that IR35 was here to stay, the Revenue’s fight against the ‘disguised employee’ has snowballed. HMRC’s much publicised IR35 taskforce has grown dramatically since it was introduced, with a fourth specialist team recently created who are tasked solely with carrying out IR35 enquiries. As well as this surge in activity, the 256 cases in 2013 are promised as ‘just the beginning’ of the Revenue’s promised crackdown.

What contractors need to be made aware of is that HMRC are putting more resources into the governing of IR35, so the sharp increase in the number of enquiries is something very real, and certainly something that the industry has been encountering.