Taxman hesitates over IR35 quandary

Plans by HM Revenue & Customs to recoup some of the lost money are bound to crop up in the imminent pre-Budget report, if not necessarily in the speech of chancellor Gordon Brown.

At the moment, though, it is unclear exactly what the taxman will do about tackling the problem.

The issue as it related to individuals a few years ago was resolved by the IR35 clause, but people are now setting up and joining ‘composite’ companies – essentially just groups of people – as a way of getting around the rules.

Composite companies operate as service companies that provide employees. Since the employees of a composite company are contractors, the employing company does not have to pay national insurance contributions for them.

While HMRC already has the powers to tackle this practice, with IR35, it isn’t using them and favours a broader solution instead.

‘I think that enforcement is the heart of the problem. They have the laws in place but it’s about enforcing them,’ said Redston.

HMRC officers could go for each individual company set up within a composite if they are avoiding tax. But Redston said doing this could create a resource issue, perhaps requiring hundreds of staff to target individuals one by one.

Another option would be to send out personal liability notices to those running the composites, making the composites liable for the companies avoiding tax through them.

‘HMRC has a lot of weapons it is not using, and I’m not sure why,’ said Redston. ‘It seems to me it could.’