Number of IR35 investigations by HMRC quadruples in the last year

Two thirds of investigations yielded a result for Her Majesty's Revenue and Customs.

HMRC conducted 5 times as many investigations into those it suspects of abusing the IR35 rules on tax and national insurance for contractors this year compared to last. There were 256 cases in 2012/13, compared to just 59 investigations into IR35 in the previous year. 
The IR35 rules were introduced by HMRC to target those falsely registering as self-employed for tax purposes. The legislation prevents contractors and freelancers from reducing their tax and national insurance contributions through the use of intermediaries such as ‘Personal Services Companies’, in circumstances where HMRC would deem them to be effectively working as employees.
The steep increase in investigations could signify trouble for some freelancers as HMRC steps up its efforts on pursuing possible tax evaders. Although two thirds of investigations conducted in 2012/13 yielded “positive” results, the approach has led some innocent freelancers to be challenged unnecessarily, which is resulting in large professional fees for some. 

HMRC’s attitude towards IR35 hardened following a small number of high profile tax evasion cases in 2012 involving senior executives in the public sector and BBC. However, this legislation affects everyone working on a contract basis, and it’s very complicated, meaning some honest freelancers are falling foul of the rules.
Many freelancers are facing investigations due to incorrectly drawn up contracts, with the biggest pitfalls being issues surrounding office parties, gym access and other perks offered by employers. Even where contracts are drawn up to be IR35 friendly, contractors can still fall foul of the rules based on their working practices and behaviours at their end clients. A big worry now is that the terror of falling foul of IR35 will deter many from going freelance. That’s bad news for companies that prefer the flexibility of using contractors, and bad news for anyone put off building a portfolio career or using freelancing as a way to balance work with their family responsibilities. 
Having yielded £1.1 million in 2012/13 from IR35 investigations, HMRC is likely to keep tightening freelancers in the hope of recouping further tax payments. Helen Christopher, Operations Director of Orange Genie Accountancy says that the best way forward for Freelancers and Contractors is to “consider their IR35 position early on in any relationship and regularly review this. If the taxman comes knocking it is important to have considered your situation and to have evidence to hand to support your status.”

Orange Genie Accountancy work in partnership with Bauer & Cottrell to provide our clients with the very best and latest advice in relation to IR35. Bauer & Cottrell enjoy an excellent reputation for IR35 compliance and their reviews are founded on principles of honesty and integrity, values they share with Orange Genie Accountancy.


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