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IR35 tax is a huge failure

Tiny tax take leaves controversial system in jeopardy

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Opinion Under the Freedom of Information Act, the Professional Contractors Group has been able to find out how much tax the British government has raised from IR35.

IR35 was introduced in 2000, as a means for the Government to stamp out what it considered to be "disguised employee" arrangements, which reduced tax and national insurance payment of supposed freelancers by 25 per cent. The introduction of the tax caused uproar among UK contractors, especially in the tech and engineering industries, who operated alone as one-person companies or as two-person companies in partnership with wives or husbands.

Through its FOI request, the PCG has established that the Government raised just £9.2m from IR35 in the tax years 2002/3 to 2007/8. No wonder the Government said it didn’t know how much revenue it earned from IR35 when asked in Parliament and elsewhere.

It is raising just £1.5m a year from the tax, a tiny amount in terms of the overall tax burden. The Government had expected to raise £220m a year in National Insurance contributions alone, without even taking the extra income tax into account.

The Government must have noticed the big disparity between what it expected to raise and what it is getting - a fraction of one per cent of what it anticipated from the introduction of IR35. How many contractors can be paying this tax - a couple of thousand?

HMRC is spending an extra £1bn in chasing up tax evasion and you can see what a paltry amount it is collecting for its trouble. All the cases being fought in the High Court and at the Special and General Commissioners over IR35 have just been a monumental waste of effort.

According to the PCG, HMRC has won just a handful of tax investigations out of thousands. Indeed, of the 1,468 IR35 investigations PCG has been involved with, HMRC proved additional tax was owed just six times. The Government can’t continue to waste its own time, and that of HMRC and countless IT contractors, over a tax that probably costs more to collect, with sundry litigation costs, than it brings in

When opposition MPs get a hold of this information, IR35 must be doomed. One cannot see the Conservatives deciding this tax is worth retaining when there is an opportunity promise its abolition and grab the votes of thousands of contractors across the country.

Surely the Government will have to drop IR35, now that the cat is out of the bag. The PCG has proved that the system as it stands is a miserable failure. It would be both obstinate and stupid to keep it.

We know that Gordon Brown is obstinate, but he’s not stupid. Watch the pressure for its abolition to mount.

Gerry Mclaughlin is the founder of IT Contractor, a portal for, yes, IT contractors.

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