Number of IR35 investigations by HMRC quadruples in the last year
There were 256 cases in 2012/13, compared to just 59 investigations into IR35 in the previous year.
The IR35 rules were introduced by HMRC to target those falsely registering as self-employed for tax purposes. The legislation prevents contractors and freelancers from reducing their tax and national insurance contributions through the use of intermediaries such as & lsquo;Personal Services Companies’, in circumstances where HMRC would deem them to be effectively working as employees.
Bloomsbury says that the steep increase in IR35 investigations could spell trouble for some freelancers as HMRC steps up its efforts on pursuing possible tax evaders.
Bloomsbury explains that although two thirds of investigations conducted in 2012/13 yielded “positive” results for HMRC, some innocent freelancers are still being challenged unnecessarily, which is resulting in big bills for some.
Martin Casmir, managing director at Bloomsbury Professional, said, “HMRC’s attitude towards IR35 hardened following a small number of high profile tax evasion cases in 2012 involving senior executives in the public sector and BBC. However, this legislation affects everyone working on a contract basis, and it’s very complicated, meaning some honest freelancers are falling foul of the rules.”
Bloomsbury explains that many freelancers are facing investigations due to incorrectly drawn up contracts, with the biggest pitfalls being issues surrounding office parties, gym access and other perks offered by employers.
Martin Casmir added, “Minor oversights when agreeing contracts could result in a big financial blow for freelancers hit with an investigation by HMRC. Time consuming and extremely costly, the burden of an investigation can really affect a freelancer’s livelihood.”
“A big worry now is that the fear of falling foul of IR35 will deter many from going freelance.”
“That’s bad news for companies that prefer the flexibility of using contractors, and bad news for anyone put off building a portfolio career or using freelancing as a way to balance work with their family responsibilities.”
Bloomsbury Professional says that having yielded £1.1 million in 2012/13 from IR35 investigations, HMRC is likely to keep pursing freelancers in the hope of recouping further tax payments.
Casmir continued, “HMRC has to meet tough tax yield targets for the coming year, meaning they’re even more likely to pursue those it suspects of tax evasion. It could be that even greater numbers of innocent freelancers will be dragged through the mill.
“I’d suggest the best thing for contractors to do is to be compliant if they’re faced with an investigation. But really prevention is the best option, and that means being extra careful when drawing up contracts for clients, even if that means paying for advice.”