Putting a price on the uncertainty of IR35

In the third part of our interview series with the Revenue's IR35 chief, John Hinton, at IR HQ in Somerset House - our reporter Richard Powell asks about the costs of supporting IR35 to date...

In 1999, the Professional Contractors Group published a Regulatory Impact Assessment outlining the estimated costs of IR35, which stated it could lead to a £705 million tax loss rather than the Inland Revenue's predicted £300 million tax gain.

Three years on, the subject of the cost of IR35 has cropped up numerous times in the House of Commons and at conferences around the UK, but official responses have been, at best, minimal.

Last year the Tories announced they would repeal IR35, estimating it would cost them £150 million to do - leading to Andrew Smith, the Chief Secretary to the Treasury, saying: 'IR35 raised £900 million [in 2000] - it would cost at least

£900 million to abolish it.'

I asked Mr Hinton how much it had cost the Inland Revenue to support IR35 by way of administration and related costs to date?

"The cost of operating IR35 is 'minimal' because we already had the status inspectors in place. The system was there, the structure was there and so any extra costs of IR35 are pretty small" - John Hinton on the cost to the Revenue of supporting IR35

Mr. Hinton- "Leaving aside the time and effort put into the judicial review, there were considerable costs in addition to the legal costs we could recover. The cost of operating IR35 is 'minimal' because we already had the status inspectors in place. The system was there, the structure was there and so any extra costs of IR35 are pretty small. IR35 has been very useful in some ways: we have had to do some training, we have got our own internal discussion forum on status and all of that has been developed as a consequence of IR35."

UKTECH- What's the set up of your IR35 team?

Mr. Hinton- "The status inspectors are based around the country. They're supported by technical advisors in Solihull (who specialise in Income Tax) and another office in Newcastle, (which specialises in National Insurance). These status inspectors deal not only with IR35 but with other issues too."

UKTECH- We have received reports from some of these Revenue workers at grass roots level that the shift in what IR35 purports to do has led to unclear decisions being made. What is your response to those reports?

Mr. Hinton- "Well, that has puzzled us because we've asked around all of the people that deal with IR35 in the Revenue and we don't recognise where these reports are coming from. What we've got is a group of specialists who determine employment status. We've got considerable material available through the employment status manual and we've got a forum for these specialists to share information and best practice. I don't know where these reports have come from and we don't really see any reason for any confusion because of the way we've developed guidance. If you've got further information then please let us know."

UKTECH- Still on the subject of costs, but coming from the other side of the contractors themselves - given the ongoing uncertainty of IR35, what is the Revenue's policy on penalties for those unwittingly caught by the legislation, either because they didn't tick the appropriate P35 box or because they just couldn’t determine whether they were in or out?

Mr. Hinton-"There is a concession in place that effectively means we’re not pressing hard on penalties around the first year. That concession will remain in place until Ministers decide to withdraw it."

UKTECH- Why the leniency? Surely that's a statement from the Revenue saying - 'Fair enough - IR35's unclear, so if we hit you when we're not supposed to then we'll try not to hit you too hard?'

Mr. Hinton- "No. It's because IR35 is new."

UKTECH- It's not really new though is it? It's been with us for quite some time now.

Mr. Hinton- "Well, we're coming up to IR35's second year now - that's not really longstanding. I don't know how long the concession will remain in place, but it will stay until Ministers tell us otherwise."

Tomorrow, part four in the John Hinton interview series looks at the size of businesses affected by IR35 and the surrounding issue of competition as well as employee benefits for contractors.