Contractors have their part to play in filling the UK’s £35bn tax gap. But they should not be perceived by HMRC as easy targets, while the taxman gives the UK’s big companies an easy ride. Now, more than ever, contractors should be extra vigilant to ensure they are prepared if the taxman comes knocking.
In its Measuring Tax Gaps 2011 report, HMRC has revealed that the gap between the tax actually paid and what should theoretically be paid has fallen from £39bn in the 2008-2009 financial year to £35bn in the 2009-2010 financial year. The over-stretched HMRC is to be applauded for its efforts to reduce the tax gap and increase tax revenues, particularly when the UK needs all the tax it can get to cover the public sector deficit.
But is the tax burden greater for some types of taxpayer than others? According to HMRC’s own head of tax, Dave Hartnett, this would seem to be the case. Accountancy Age’s Rose Orlik writes that, “Hartnett told a Treasury Select Committee that proper policy ‘was not fully followed’” when striking tax deals with corporates operating in the UK. And HMRC’s own figures highlight that the underpayment or avoidance of corporation tax by large businesses cost the exchequer £2.1bn in 2009-2010. This does not suggest that big businesses are playing their part by paying the tax they owe.
But despite this, HMRC seems to be focusing disproportionately on smaller businesses, including contractor limited companies. For example, it seems inevitable that its Business Records Checks campaign will have contractor limited companies falling within its scope. This campaign is yet another stick HMRC can use to beat small businesses. And the decision to hire over two thousand new inspectors to target ‘the wealthy’ will inevitably result in contractor casualties.
Large businesses can afford expensive accountants to do the very deals Hartnett mentions. So contractors and other ‘little guy’ taxpayers become an attractive and potentially easy target for HMRC. This is particularly the case for the many contractors who have rolled-over on issues such as IR35. In countless cases where individual contractors were almost certainly outside IR35, they have ended up paying tax as if they were employees.
But contractors can fairly easily and inexpensively make sure they are well placed to face any HMRC onslaught. Preparing a good defence against an investigation and submitting accounts that minimise tax liabilities fairly are neither expensive nor time-consuming. A contractor accountant will easily cover their costs and more with the tax savings they can make on behalf of their contractor clients. And tax investigation insurance is not expensive and even comes with membership of trade bodies such as PCG or the Federation of Small Businesses (FSB).
More than ever HMRC is looking to raise additional tax revenues. Contractors can prepare by staying compliant through simple measures like good record keeping and investing in tax investigation insurance. Contractors don’t have to be victims of a government and HMRC desperate to close the tax gap.