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Four times as many investigations into people suspected of abusing the IR35 rules on tax and national insurance for contractors were conducted by HMRC this year, compared last year, it has emerged.
There were 256 cases in 2012/13, compared to just 59 investigations into IR35 in the previous year, according to tax and accounting publisher Bloomsbury Professional.
Introduced by HMRC to target those falsely registering as self-employed for tax purposes, the IR35 rules prevent contractors and freelancers from reducing their tax and NICs through the use of intermediaries such as ‘Personal Services Companies’, in circumstances where HMRC would deem them to be effectively working as employees.
“HMRC’s attitude towards IR35 hardened following a small number of high profile tax evasion cases in 2012 involving senior executives in the public sector and BBC,” said Martin Casmir, managing director at Bloomsbury Professional. “However, this legislation affects everyone working on a contract basis, and it’s very complicated, meaning some honest freelancers are falling foul of the rules.”
Two thirds of the investigations conducted in 2012/13 yielded “positive” results for HMRC, totalling £1.1 million. However, some innocent freelancers are being caught out, Bloomsbury said.
Incorrectly drawn up contracts and issues surrounding office parties, gym access and other perks offered by employers are among the biggest pitfalls for freelancers, the publisher said.
“Minor oversights when agreeing contracts could result in a big financial blow for freelancers hit with an investigation by HMRC,” Casmir added. “A big worry now is that the fear of falling foul of IR35 will deter many from going freelance.”
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