Crackdown on IR35 raises £4.2bn extra tax

Changes to IR35 off-payroll working rules affected 120,000 contractors and raised an additional £4.2bn in tax in just four years

HMRC figures showed the clampdown in IR35 raised around £4.2bn in additional tax, National Insurance contributions (NICs), and apprenticeship levy payments with the average person affected paying £10,000 more in tax. From April 2017 the this impacted the public sector, then the private sector from April 2021.

In the second HMRC report on the impact of the changes and the use of personal service companies (PSCs), HMRC said the take home pay of contractors fell because ‘those PSCs and their workers who changed payrolls around the time of the reform tended to have above average earnings compared to the whole of the UK population’.

But HMRC warned: ‘This interpretation of some workers seeing minimal changes to take-home pay should be treated with caution, as there are several reasons why some workers may have seen a reduction in take home pay due to factors that we cannot observe from available data.’

This was due to individuals reporting ‘lower profits before the reform due to the ability to claim allowable deductions which may no longer be available once the worker has changed how they provide their services’. Additionally, HMRC said estimates for the average tax paid could be lower than actual tax take.

Between October 2019 and March 2023 HMRC said tax take increased by £4.2bn, with the highest yielding year being 2019-20, raising £1.9bn due to payment of higher PAYE taxes in that tax year and corporation tax being paid related to previous years.

As a result of the 2021 reforms, which were designed to reduce the use of IR35 and force companies to hire contracts on the payroll, less personal service companies were set up, with HMRC estimating that there were 45,000 fewer new PSCs between April 2021 and March 2022 than what was predicted based on previous trends.

In total HMRC estimated 280,000 individuals moved from being paid through PSCs between October 2019 and March 2022, including those who transferred across to PAYE employee status. An estimated 40% of these moved solely because of the reform, HMRC said, however, ‘other events’ such as the pandemic may have also impacted this.

Of those who opted out of using PSCs, 96% then either became employees of the organisation they were contracted by, 69% of the 96% ‘moved to organisations that are not agencies or umbrella companies, 18% moved to an umbrella company and 13% to an agency, according to HMRC.

Along with these workers HMRC said 0.5% (1,400) moved to companies which offered disguised remuneration schemes between 2019 and 2022, noting that ‘there will be some overlap between this population and those who have moved to umbrella organisations’.

Disguised remuneration schemes were flagged as an ongoing problem for HMRC, and it continues to try to tackle promoters and scheme users.

The contractors most affected by the changes were those working in the IT, professional and scientific sectors, which then consists of legal activities, accounting and bookkeeping, architectural and engineering activities, advertising and market research and several more.

HMRC added that up to 1.5m people may have been working through a PSC at some point between 2015 and 2022, and although the IT sector was the most prolific user, several other sectors were impacted.

These included construction, transport and storage, vehicle repair and trade, manufacturing, and the financial sector.

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