Leading IR35 expert raises concerns over the accuracy of HMRC’s tax revenue calculations and contractors affected by private sector reforms
The new figures in HMRC’s recently updated IR35 impacts report should be regarded with “extreme scepticism”, and the tax authority’s “models and research” underpinning the report are “unreliable”, according to a report published by Computer Weekly.
In its coverage, it cites calculations made by a leading IR35 expert, which are at odds with the estimates published by HMRC in its report, which was updated in late February.
According to Dave Chaplin – CEO of IR35 Shield and a prominent figure in the industry – HMRC’s data contains “concerning” discrepancies.
These relate to estimates made by the tax office before the introduction of the private sector IR35 reforms about the number of workers expected to be affected by them, and how much revenue the move would generate.
“Unreliable” HMRC data a source of concern, says Chaplin
HMRC’s initial estimates into both the number of contractors affected by the reforms and the amount of tax revenue raised, have led to “raised eyebrows”, according to the Computer Weekly article.
In the rationale provided to Computer Weekly, Chaplin suggests HMRC’s calculations are out by some margin.
In the updated version of its report, the tax authority suggested “around 120,000 individuals” were affected by IR35 reform in the private sector. Similarly, the most recent estimate for tax revenue generated by the reform is circa £4.2bn.
However, Chaplin says these numbers are at odds with earlier estimates. Originally, HMRC believed around 170,000 contractors would be within the scope of the changes, and tax revenues were predicted to be much lower – at around £2.395bn, as quoted by Computer Weekly.
Instead, the most recent calculations suggest HMRC has generated considerably greater tax revenue from fewer taxpayers: around “75% more revenue” generated by “50,000 fewer people”, said Chaplin.
HMRC figures ‘undermine confidence in official narrative’
Chaplin went on to say that this was “implausible”, and the number of contractors affected “seems significantly underestimated”.
“If the original projection of £2.4bn was based on 170,000 people”, Chaplin said, “that equals £14,088 [of additional tax revenue generated] per person.”
Using this figure, Chaplin says HMRC would need to collect that amount from almost 300,000 people, “not 120,000”. This is closer to calculations previously produced by Chaplin which suggested over half (58%) of the contractor population (estimated to be around 510,000) was affected by IR35 reform: “more than double HMRC’s estimate”.
According to Chaplin, this discrepancy “further undermines confidence in the official narrative, and suggests policy decisions were based on flawed information rather than accurate assessments of the freelance market’s reality”.
The impact of IR35 is deeper than just numbers. I am some Director of my own Ltd company. I disagree with the entire principle of IR35, because it seeks to treat contractors the same as employed personnel for the sole purpose of raising more tax revenue, without recognising the extra unpaid work that a contractor must perform to administer and market their business and to make sales to gain work in the first place, before any income is generated. Plus, the unpaid holidays, training days and sick days.
The hidden impact is that I have deliberately chosen not to pursue any opportunities that are advertised as falling with IR35. So, I have potentially lost revenue and the businesses that require people like me may have ended up giving the work to someone who was less qualified, experienced or capable, but who was willing to accept IR35 conditions.