HMRC is targeting high earning contractors, alongside any other low hanging taxpaying fruit, as part of a new strategy to raise greater tax revenues with fewer resources. Threat levels for contractors will only increase, following the Chancellor George Osborne’s defeat over tax credits leaving him with a £4bn hole to fill.
This switch towards targeting high earners is only one of many measures impacting negatively on contractors now and from April 2016. Contractors need to be prepared, making sure their tax affairs are in order and they are rigorously applying IR35 best practice.
Why is HMRC more of a threat now than previously? Well, the taxman has been tasked with collecting as much tax as it can, but with less cash and a reduced headcount. At the same time, it has been told it must also improve customer service. To be fair, if HMRC were a business, that would be a tough assignment for any manager.
And the taxman has responded to the challenge with a new strategy. Economic Voice reports that according to accountancy firm Moore Stephens: “HMRC’s Affluent Unit has increased its headcount by 54% in two years.” There are now 327 specialists targeting those earning more than £150,000 a year, compared with 213 in 2012/13. Contrast that with only 40 IR35 specialists. Low hanging fruit.
Furthermore, the intense criticism of HMRC by the Public Accounts Committee shows that HMRC has given up any pretence of supporting regular taxpayers. Regular taxpayers don’t tend to pay that much tax, individually.
Even more alarming is that HMRC’s Lin Homer refuted the PAC’s criticism, telling MPs their accusations were “absolute nonsense”, highlighting that the taxman really is in denial about service levels, or perhaps ordinary taxpayers whose money is collected by their employer and who are less likely to avoid or evade tax are at the bottom of the taxman’s new food chain.
This abysmal service failure has been closely followed by announcements that 137 of HMRC’s local offices are to close, further reducing the level of support available for regular taxpayers who can’t afford or justify an accountant to work with HMRC on their behalf.
So, more resources for those departments with big fish to catch; fewer resources for those parts of the organisation responsible for the little fish.
That would be a strong enough signal that HMRC is coming for contractors, but it gets worse. We knew IR35 reform was coming, but boy we did not expect the leaks in the MailOnline and Guardian about the one-month role, nor was anyone ready for the Dividend Tax changes announced in the Summer Budget. Then we have the abolition of tax relief for expenses on the cards.
A perfect storm is brewing, of a Chancellor desperate for more tax, and a new armoury of revised IR35 and other tax legislation for HMRC.
Contractors – be warned, HMRC has changed its strategy and is targeting you. Make sure your tax affairs are clean.