Investigations into suspected tax avoidance by freelancers working through their own personal companies more than doubled last year from 23 to 59 in a sign that Revenue & Customs is adopting a tougher approach to “disguised employment”.
The yield from cases where freelancers broke the anti-avoidance rules, known as IR35, in providing their services through a personal company, rose fivefold to £1.25m in 2011-12 from £219,000 the previous year, according to a Freedom of Information request submitted by Bloomsbury Professional, a publisher.
Martin Casimir, managing director of Bloomsbury Professional, says: “The crackdown on IR35 fits in with the wider picture of HMRC taking a much more aggressive approach to all sorts of tax cases where it suspects it is missing out on tax revenue.”
HMRC said it had strengthened the specialist teams that inquire into IR35 cases and would further increase its coverage this year. “Whether IR35 applies is always based on the facts of the case,” it said. “HMRC does look behind the reality of the arrangements to consider whether a relationship is one of employment.”
The government has also promised to improve the administration of IR35. HMRC said: “In addition to making more enquiries, we have issued new guidance to help to make the IR35 easier to understand and we operate a dedicated helpline to assist customers to understand their legal responsibilities.”
A row over the use of personal service companies in the public sector this year has inflamed long-running controversy surrounding the IR35 rules, which have been criticised as both ineffective and burdensome to genuine freelancers.
Danny Alexander, chief secretary, last week told the Liberal Democrat conference that rules were being put in place to stop the “scandalous situation where thousands of public sector workers were being paid in a way that potentially allowed them to pay too little tax”.
In a consultation published this summer, the government said that tax and national insurance contributions should be deducted at source on the earnings of senior people in control of organisations who worked through a personal service company
In 1999, the government said the introduction of IR35 would protect the exchequer from the annual loss of £80m of tax and £220m of NI contributions.
An individual earning £120,000 a year could save as much as £23,000 in tax and NI compared with somebody on the payroll. Users of personal service companies can deduct allowable expenses against profits before paying corporation tax and can draw income as dividends, which are not subject to NI.
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