Government IR35 Crackdown – Doomed to Failure?

The “IR35” rules are designed to prevent the avoidance of tax and National Insurance Contributions, through the use of personal service companies and partnerships – an issue that is highly topical in the press at the moment.

Recently in the press, HMRC itself have come under scrutiny after it was revealed that at least 2,000 civil servants have been avoiding substantial amounts of tax, estimated to be at least £30 million a year, by channelling their earnings through personal service companies, when they may not be eligible to do so.

Siphoning earnings through a personal service company means that the company pays tax at the corporate rate of just 20 – 25%, depending on profit, rather than an individual paying income tax at up to 50%. In addition, all expenses can be deducted from earnings before profits are calculated.

HMRC have confirmed that it plans to increase the number of staff tasked with policing IR35, but it could be argued that the damage is already done. Unless senior civil servants have more than one contract of employment, with several government departments and work from their own office, it seems likely that they technically employed which means they are not entitled to avoid the 50% top rate of tax.

With HMRC under scrutiny and the new Office of Tax Simplification involved, it could be argued that the challenge of streamlining tax rules could be starting, but it may be a very long and never ending struggle, with unknown outcomes.