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The real cost of IR35 to the contracting industry
Posted Jun 3, 2009
Last week the PCG revealed that the Treasury had raised just £1.5m per year following the introduction of IR35.
A pitiful return, given all the fanfare when the legislation was launched. The Government expected to raise an extra £220m in increased NICs alone.
However, these figures, which PCG obtained via a Freedom of Information Request, don't include the considerable cost that IR35 has had on the contracting industry.
Costs of those caught by IR35
The increased income tax and NICs collected from contractors deemed to have been caught by IR35 are at the heart of the recent PCG revelations. The real increased tax and NIC take could well be much higher - see 'Umbrella Companies' below.
Costs of complying with IR35
IT contractors have spent many millions over the past few years on extra products and services which have appeared as a result of IR35. These include IR35 insurance products, IR35 contract reviews, and other professional fees.
As Simon Sweetman points out in a recent AccountingWeb piece:
"Apart from the regular advice given to regular clients, there are firms out there that have built their entire fortunes on IR35."
Umbrella Companies
The figures don't include the additional tax and NICs collected from contractors who have joined umbrella companies as a result of the IR35 rules - these sums are likely to be considerable.
It is hard to work out how many contractors join umbrella companies for reasons of convenience, and how many do so because they believe their contracts are caught by IR35.
Poisoned Relationships
There is no doubt that the relationship between those affected in the contracting world, and HMRC, have been soured ever since the introduction of IR35.
As Simon Sweetman comments:
"The legislation was already written before consultation started and the only changes were to the advantage of big business. I hope we have all learned something since then."
Costs to the Taxpayer
Millions will have been spent creating the legislation, attempting to enforce it, and defending HMRC in a number of court cases - from the Judical Review of IR35 back in 2001, until the present day.
Personal Costs
Alongside costs which are easier to quantify, none of these points recognises the considerable stress IR35 has caused to many contractors - the uncertainty of whether their contracts are caught by the rules or not, and uncertainty over how to be 'compliant' with the legislation.
Not forgetting the thousands of contractors who have had to undergo IR35 tax investigations, or even ended up fighting a high profile court case - e.g. Dragonfly Consultancy Ltd.
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