Contractors need to take action now to curb the increasing excesses of HMRC, which is behaving without all the checks and balances such a powerful organisation should be subjected to.
We’ve seen the taxman’s refusal to make public vital IR35 data – even to Parliament –Chancellor George Osborne’s obsession with awarding HMRC ever more dangerous anti-avoidance powers, and the damning House of Lords Select Committee on Personal Service Companies report slamming IR35. The taxman is even proposing to sell-off taxpayers’ personal financial data to private firms.
Contractors should cover themselves with investigation insurance and IR35 protection to ensure they cannot be bullied into submission. And we should collectively support tax professionals in their fight against over-regulation, while mobilising to kick-start the democratic process that will curb HMRC’s excesses.
The high profile thin end of the wedge
HMRC has refused to provide ContractorCalculator with key data about the taxman’s performance since it introduced its so-called “better administration” of IR35 and its business entity tests in May 2012, despite being told to do so by the Information Commissioner.
The taxman was also unable to pull the wool over the eyes of the Lords as they conducted their inquiry into the use of personal service companies (PSCs). HMRC has been heavily criticised for its lack of transparency and justification for IR35’s revenue-generating impact. However, Lords’ Select Committees have no power and limited influence over government agencies.
Tax and legal professionals are increasingly concerned, as are MPs on the Treasury Committee. They are particularly worried about the Chancellor’s proposals to allow HMRC to take money directly from taxpayers’ bank accounts, and to assume criminal liability and an intention to evade tax if undeclared funds are held offshore.
The taxman is even considering plans to sell on ‘anonymised’ personal financial data to businesses and researchers, in a plan that Conservative MP David Davis is quoted as describing as “borderline insane”.
A hardening and heavy-handedness by an uncooperative HMRC
The above are the more headline raising issues. But HMRC is also becoming increasingly heavy handed and has increased by a factor of fourteen in just one year its use of distraint to seize and sell business assets to cover tax bills.
And there are some even more shocking contractor-specific examples than IR35. PCG discovered that HMRC’s large business service was writing to contractor clients requesting full details of all individuals, companies and partnerships that have been paid between £1,000 and £350,000 during the 2012-2013 financial year.
This is a shocking example of how HMRC could potentially lose a contractor their livelihood without any evidence or justification. And it seems that right now no one can stop the taxman from doing this.
Have tax inspectors forgotten the boundaries of appropriate behaviour? They appear happy to give a free pass to global corporates with expensive lawyers and accountants, while coming down hard on small businesses. In fact, its need to justify the “deterrent effect” of IR35 leads it to bully contractors in the hope that contractors will over-pay their tax because they fear being hauled over the coals and through the courts by the taxman.
How contractors can act
Contractors can do two things: ensure they are fully protected in case they are investigated by the increasingly hard-line HMRC; and fight back using the UK’s democratic processes.
For the former, this means at the very least investing in basic tax investigation insurance and IR35 investigation cover. That enables contractors to continue to defend against a sustained investigation and not be forced to throw in the towel because of mounting professional representation and defence fees.
Contractors should also ensure their tax affairs are up-to-date and as squeaky-clean as their personal appetite for risk allows. A good contractor accountant can ensure compliance, and any contractors choosing to enter tax avoidance schemes should be fully aware of the facts and risks before taking any decisions.
Use the democratic process, and professional and membership organisations
UK-resident contractors will have a democratic representative, and that’s what MPs and MEPs are there for. To represent their constituents and provide the checks and balances required for state agencies to ensure good governance. Let them know your concerns.
There are also membership and professional organisations lobbying hard to introduce reasonable controls over government, the Treasury and the taxman. The Chartered Institute of Taxation (CIOT) and various accountancy bodies should be supported with examples and experiences that will bolster their campaigns
Contractor organisations such as PCG are also there to protect and lobby for members. Joining the PCG comes with varying types of tax investigation protection as standard, depending on the level of membership.
Whatever happens, contractors should not stick their heads in the sand. As the little guys unable to afford large finance departments or expensive tax experts, contractors and other small firms have always been easy targets for tax inspectors looking for an easy scalp.
But only through taking appropriate measures can we prevent HMRC’s progress towards over-arching powers over what we earn, and what we’re “allowed” to spend.