If the number of status enquiries is so low, why bother taking out IR35 protection?

Last month, HMRC published data which showed that there had been a startling drop in IR35 status enquiries in recent years.

HMRC undertook 158 status reviews in the 2006/7 tax year, but just a mere 12 in 2009/10 and 23 in the year ending April 2011.

The amount of back taxes collected as a result of these reviews also dropped from £1.9m in 200/7 to just £219,000 in 2010/11.

Unsurprisingly, this data has been quoted widely in the press, as evidence that IR35 is ineffective.

Although the amount of tax raised as a direct result consequence of status reviews is small, some commentators believe that the deterrent effect of IR35 could be worth as much as £500m to the Treasury – in terms of contractors who declare their contracts as ‘caught by IR35’, and the thousands of contractors who subsequently use umbrella companies rather than personal service companies.

This also explains why the Chancellor decided to keep IR35 in place at the last Budget, as it would “put substantial revenues at risk”.

However, given that the number of status reviews are so low, is it still worth undertaking IR35 contract reviews, and buying IR35 insurance cover, if the chances of being investigation appear to be so small?

Number of IR35 enquiries will increase

Seb Maley from Qdos Consulting explained why he believes contractors should not let their guards slip where IR35 protection is concerned:

“Basically I think all of the comments criticizing these figures are a little bit misguided. Two things we know for sure: a) HMRC are winning IR35 cases and b) the number of IR35 enquiries will increase in the near future. Things may have been quiet over recent years, but I genuinely believe it’s a case of calm before the storm. Therefore there’s no better time to start protecting oneself.

“The introduction of the Agency Workers Regulations mean that agencies and end users will never be more accommodating for contractual amendments and statements of working practices, so it really is an opportune time to make positive changes.”

If you’re concerned about the Off-Payroll (IR35) rules, check out IR35 Complete.

About the Editor

  • James Leckie

    James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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Last updated: 12th August 2023