Seven year high in IR35 investigations

The period since 2011-12 has seen a quadrupling in the number of new IR35 investigations into consultants and Freelancer Accounting (http://www.freelanceraccounting.com) using limited companies, the many freelance clients of Canary Wharf accountants may be interested to read. It brings the number of enquiries in a 12 month period to the highest level for seven years, according to official data.

No doubt that many Canary Wharf accountants and their clients will have taken note of the new figures recently released by HM Revenue & Customs (HMRC), showing that in the 12 months from April last year, 256 IR35 enquiries were launched. This compares to a mere 59 in the previous tax year, 2011-12.

It equates to a greater number of freelancers and contractors facing an IR35 investigation in 2012-13 than in all of the previous five tax years put together, which saw a total of 223 enquiries being made under the legislation. The latest data vindicates HMRC's earlier pledge to MPs that the target of 230 IR35 probes a year would be exceeded.

However, this figure is a long way shy of the 2,000 enquiries a year that the website of the freelancers' trade body, the PCG, had claimed to have been made under the rule in the five months since May 2012. Indeed, according to HMRC data, even the 1,000 barrier of total IR35 investigations has only been broken twice, in 2003-04 and 2002-03, when there were 1,166 investigations and 1,016 investigations respectively.

However, the 2012-13 figure is still the highest that it has been for some time, freelancers making use of Canary Wharf accountants may be intrigued to know. Indeed, one has to look back to 2005-06 to find a higher figure, with 656 investigations having been launched that year.

As for the current 2013/14 tax year, the first six months have seen 112 IR35 investigations carried out, a Lords committee investigating personal service companies was told. This is well short of the 193 IR35 investigations that had already been launched at the same point in 2012-13. However, the 112 figure still constitutes almost one investigation per day being opened by HMRC since the commencement of the current tax year.

As HMRC's employment status team leader, Robin Wythes, stated to the Personal Service Companies Committee, the 112 cases launched thus far were "all cases that we consider to represent a high risk of IR35… i.e. those companies where, generally, we believe all their contracts of the year would be within IR35."

In other news of relevance to contractors making use of Canary Wharf accountants, HMRC officials also revealed a fall in the average duration of an IR35 enquiry, from 110 weeks and 140 weeks in previous years, to 28 weeks in the current tax year. Mr Wythes said that "Possibly, in truth for the first time, [HMRC is] trying to see IR35 from the view of the worker," also asserting the need for Business Entity Tests - part of last year's released IR35 guidance - to be made "fit for purpose."

Editor’s Note: Freelancer Accounting (http://www.freelanceraccounting.com) are represented by the search engine advertising and digital marketing specialists Jumping Spider Media. Email: info@jumpingspidermedia.co.uk or call: +44 (0)20 3070 1959 / +34 952 783 637.