What a Waste

I’ve previously mentioned IR35, the measure introduced in 2000 to close what was seen as a loophole, most significantly for freelance workers to reduce the amount of their National Insurance payments. It’s a move much disliked by those targeted, and has not endeared the New Labour Project to them.

Previously, a typical freelance worked through a limited company – and one very good reason for this is that the Inland Revenue pointed them in that direction in the first place. This enabled those freelances who were company directors – which, for one man companies, read all of them – to take money out of the company in the form of bonuses. Those bonuses were liable to income tax, but not National Insurance. Thus the saving, and the alleged advantage.

However, there was an unwritten quid pro quo at work. Those same freelances taking payments as bonuses would also be far less likely to claim benefits when out of work: typically they would use the time to take holidays, brush up on their skill set (through training), or merely catch up on house, garden, car, family or hobbies. So the Government would not be out of pocket; rather, it’s entirely possible that the arrangement worked in their favour.

However, such arguments cut no mustard with a Treasury that has identified what it sees as an additional source of tax revenue. There may also have been some thought that the Friday-to-Monday freelances appearing across Civil Service departments (permanent employees leaving and then reappearing as contract workers) were typical of all freelances. This was denied by the Inland Revenue when IR35 was challenged by the Professional Contractors Group (PCG), but as Mandy Rice-Davies might have observed, they would say that, wouldn’t they?

Well, IR35 has been with us for almost a decade, and so it is possible to examine its success in raising what was estimated to be an additional 200 millions each year for the Treasury. The PCG have helpfully put in a Freedom of Information (FOI) request, which has revealed that the total additional revenue raised by the measure between 2002/3 and 2007/8 – six years – has been 9.2 millions. That’s a little over a million and a half each year. Put another way, it’s a lousy three-quarters of one per cent of the amount that the measure had been expected to raise.

Just how much money is being expended pursuing IR35 related cases is not clear, but you don’t get many actions for 1.5 million. More likely is that the amounts being chased are less than those spent pursuing them.

As Ian Dury put it, what a waste.