IR35 to be retained

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 Abolition of IR35 ruled out as administrative costs reach £16m

HMRC has released details of the administrative costs of operating the IR35 system, in response to the recommendations of the House of Lords Select Committee on Personal Service Companies, which last year called for justification for retaining the system report Harris & Co chartered accountants Northampton, the specialist small business accountants

The annual administrative burden which taxpayers incur in dealing with IR35 is estimated at £16m while HMRC says that abolition of the system would result in a loss to the Exchequer of £550m.
In a policy statement issued on 12 March, the government stated that it ‘remains firmly of the view that the administrative burden of IR35 is proportionate when considered against the fiscal risk to the Exchequer of those incorporating to disguise employment income’.
The calculations are modelled on a profile of the end of year return (P35) in 2010-11 which shows that approximately 6,000 people operated through a service company and were applying IR35 at that time.
Where IR35 applies, all the income paid to the company as a result of work under that contract is deemed to be employment income. This means that they have to pay employer national insurance, employee national insurance and income tax on all of the income from that contract.
The loss of tax revenue would be exacerbated by individuals who currently apply IR35 deciding to move to incorporated status, according to the tax authority.
HMRC said: ‘We have assumed that 4% of all current employees earning above £50,000 would incorporate in the absence of IR35. This gives a population of approximately 55,000 individuals’.

Quite where the 4% figure came from is anyone"s guess and, of course, it assumes that the individuals would have the choice of moving into a personal service company (and many of them would not).
There would also be an impact as directors reviewed their tax position. The HMRC impact assessment says: ‘We have profiled current directors with both employment income and dividend income who extract 50% or more of their income as dividends. We have assumed that 40% of them would change their behaviour in the absence of IR35. This gives a population of approximately 220,000 directors.

Again, quite why 40% of  directors of a company  would change their behaviour is anyone"s guess.

Also why a director of a company earning over 50% of their income in dividends would switch to another company that could pay them dividends is mystifying since they could just take more dividends from their existing company!!
HMRC"s figures are highly questionable to say the least!!

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