HMRC warns of £550m 'cost' of abolishing IR35

IR35 anti-avoidance measure is cost-effective, claims HMRC in report

Abolishing IR35, the tax-avoidance regime introduced in 2000 intended to prevent individuals from being employed like employees, yet paying tax as a freelance contractor, would reduce tax collection by as much as £550m, HMRC has warned the Treasury.

Furthermore, with the cost of running the scheme - widely disliked by IT contractors - pegged at £16m it is also cost-effective, according to HMRC. "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 [as a personal service company] to disguise employment income," claimed HMRC in a report.

It added that the organisation has done much to address some of the issues that have dogged IR35 since it was introduced, including "significant work in recent years to improve the administration of IR35". The details are contained in an HMRC report published earlier this month, called "Estimating the administrative burden of IR35 and the cost of abolishing it".

It claims that any relaxation in the regime would encourage many people and companies to shift to self-employed status, while effectively remaining employed by one company in order to avoid tax. Indeed, HMRC believes that four per cent of employees currently earning in excess of £50,000 per annum would shift status - approximately 55,000 taxpayers.

"The main areas of uncertainty in this costing relate to the salary levels at which individuals would incorporate and the number of directors who would change their remuneration strategy in the absence of IR35. These behavioural assumptions are inherently difficult to estimate," adds the report.

IR35 is intended to stop contractors from incorporating as a limited personal service company (PSC) in order to avoid paying tax and NICs, according to law firm Pinsent Masons' Outlaw.com website. It continues: "Where IR35 applies, the contractor must pay broadly the same tax and NICs as an employee would."

According to HMRC, almost all of the estimated £16m cost of maintaining IR35 is spent determining whether it applies - the remaining £200,000 is the cost to taxpayers of working out how much they owe HMRC.