Abolishing IR35 would cost £550m per year, HMRC claims

ABOLISHING the IR35 regime would prove far more costly to the public purse than continuing to operate it, HM Revenue & Customs claims.

According to figures released this week, continuing to operate IR35 will incur administrative costs of £16m, while repealing it would hit the Exchequer to the tune of £550m per year.

The legislation, designed to prevent people from lowering their tax bill by not being directly employed, has been the source of various controversies in recent years.

There was public and political anger in 2012 after it was revealed 2,000 senior office holders of public bodies were revealed to be receiving payment off-payroll, while the BBC revealed later in the year that 148 of its 467 presenters were engaged in the same fashion.

The numbers were reached based on figures from 2010/11, when around 6,000 operated through a service company and were applying IR35.

The make-up of the cost of abolishing IR35 is split into two distinct portions: the direct cost and the behavioural cost.

The direct cost to the Exchequer – put at around £30m – is the difference between tax paid on salary taken from the company where IR35 applies and tax that would be payable if the individual adopted the most tax efficient remuneration strategy in the absence of IR35.

The second, behavioural, cost is further split into the behaviour of directors and the behaviour of employees. HMRC profiled current directors with both employment income and dividend income who extract 50% or more of their income as dividends. It assumed that 40% of them would change their behaviour in the absence of IR35, giving a population of approximately 220,000 directors.

For the employees, HMRC assumed that 4% of all current employees earning above £50,000 would incorporate in the absence of IR35, giving a population of approximately 55,000 individuals.

Based on those considerations, HMRC calculated some £115m would be at risk through directors and £405m would be lost through employees; a total of £520m.

Together, the direct and behavioural costs put £550m at risk if the rule were to be abolished.

For the administrative costs, HMRC claims the vast majority of the £16m – around £15.8m – is generated in understanding the IR35 legislation and ascertaining whether it applies, with the remainder incurred in working out the deemed payment.

“The government remains firmly of the view that the administrative burden of IR35 is proportionate when considered against the fiscal risk to the Exchequer of those incorporating to disguise employment income. HMRC has done significant work in recent years to improve the administration of IR35, in particular by working with stakeholders on the IR35 Forum,” HMRC said in the calculation document.

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