Lords PSC Report: Scepticism at HMRC's IR35 figures

Calls for HM Revenue and Customs to justify IR35 in hard terms of cost and risk are gathering pace.

This was one area of criticism in the recent House of Lords Select Committee report on personal service companies. The report recommended that HMRC did more to justify and clarify the costs they incur from IR35 compliance efforts and administration, and the relationship between those costs and the overall yield gained from the legislation.

The Government's response was that this was not possible. It said: "The fact that HMRC has concentrated IR35 compliance work in specialist teams enabled HMRC to provide a very broad estimate of the cost of those teams. A more detailed administrative costing is not able to be provided because these compliance staff undertake some non-IR35 work and receive support for their IR35 work from staff outside of the teams, for example from technical specialists. The main purpose of IR35 is to deter people from disguising employment income through the use of intermediary arrangements. Accordingly, in HMRC's view, the effectiveness of its compliance activity cannot be measured solely by a comparison of compliance costs (to the extent that those can be identified accurately) to any direct yield recovered."

HMRC has frequently used a figure of £550 million as the total revenue to the Treasury which is protected by IR35.

A recent debate in the House of Lords has brought this to the fore again. Freelancer trade group, the PCG, welcomed the 'scepticism' of the Lords in their reaction to information put forward by HMRC to try to justify IR35.

Simon McVicker, Director of Policy and External Affairs at PCG said: "It was heartening to see so many members of the House of Lords reinforce their scepticism of HMRC's cost and risk estimates when it comes to the impact of IR35.

"In particular, for Lord Myners to go as far as calling HMRC's response 'flimsy' must be seen as a scathing indictment of the case put forward in defence of the legislation.

"HMRC were asked by the Committee to justify its figure of £550m as the total revenue protected by IR35. The calculation they have offered in their response is based on a series of assumptions, which is a particularly alarming admission given that this figure is the sole justification put forward for keeping IR35 in place."

"There is clearly a cross-party consensus in the House of Lords on this issue and we look forward to the Government's response to the debate."