The taxman’s latest promise to only use information gained as a result of the Off-Payroll rules prospectively, unless it suspects fraud, should “be taken with a large pinch of salt”, experts have urged.
The warning comes in response to HMRC’s latest Off-Payroll policy paper, in which it states: “HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.”
However, contractors are reminded that they don’t have to look further than HMRC’s recent history for evidence that the taxman’s words shouldn’t be taken on face value.
HMRC claim compromised by recent track record
“It’s a remarkable statement,” comments Saleos Consultancy Services director Matt Hall. “In the very same policy paper, HMRC estimates that only one in 10 private sector contractors who should be paying tax under IR35 are doing so correctly. So, the legal basis for HMRC suggesting that it will turn a blind eye to perceived historical, long-term non-compliance is unclear.
“Many, myself included, will be sceptical of such assurances,” adds Hall, who also notes that the HMRC’s proposed approach contrasts sharply with its treatment of contractors caught up in loan schemes. Hall is referring to the contentious Loan Charge, which permits HMRC to target individuals found to have engaged in tax avoidance schemes with retrospective tax bills stretching as far back as 20 years.
The contradictory nature of the taxman’s assurances is further underlined by Gordon Berry of Business Oxygen: “What HMRC is telling us is that engagement with tax strategies understood to be a solution to the uncertainty of IR35 is punishable with a new law which can be applied to actions undertaken 20 years ago, but those who HMRC say simply refused to comply with IR35 are told there will be no retrospective action. Many will rightly ask, is this what HMRC means by ‘fair’?”
HMRC’s comments also imply a degree of leniency which has been absent from its dealings with the broadcasting industry. The taxman is currently in pursuit of more than 600 BBC freelancers for backdated tax after assessments conducted using HMRC’s Check Employment Status for Tax (CEST) shortly after the April 2017 public sector implementation of the Off-Payroll rules deemed them within scope of the rules.
HMRC is ultimately suggesting that it will apply double standards by absolving private sector contractors of the same treatment. It’s a claim that harks back to the consultation phase for the Off-Payroll rules in the public sector, when HMRC insisted no private sector implementation would follow.
Why ‘legitimate expectation’ won’t help contractors
HMRC’s recent track record aside, contractors are strongly advised not to rely on the policy paper statement due to a number of caveats contained within the sentence.
For example, a contractor pursued by HMRC for backdated tax might seek to mount a legal defence based on ‘legitimate expectation’, the three pre-requisites for which a successful claim may be made were established in the landmark case of Veolia ES Landfill Ltd and Viridor Waste Management Ltd v HMRC:
- A clear and unambiguous statement has created the expectation
- The taxpayer has ‘put all their cards face up on the table’
- The public authority’s decision is considered conspicuously unfair
However, as tax barrister Alexander Wilson, of Invicta Chambers, observes, a legitimate expectation claim based on public guidance is likely to be found wanting:
“For a taxpayer to ‘put all their cards face up on the table’ generally means approaching the public authority directly and making them aware of the individual’s specific circumstances. Where Government is raising awareness about a general proposition, it’s a steeper hill to climb for an individual to prove that there was reliance on a legitimate expectation.”
Taxman’s promise contains further caveats
There are further problems for any attempted legitimate expectation defence as HMRC’s statement is narrowed by its choice of the words “information resulting from these changes”. As Berry observes, what HMRC doesn’t say is just as important as what it does say:
“HMRC says that it will only use ‘information resulting from these changes’ to enquire into earlier years if it suspects fraud. However, what HMRC doesn’t say is that it will not use other information, not directly related to the new rules, to open enquiries into earlier years.”
“How will taxpayers know what has led HMRC to enquire into their past use of a limited company?” adds Hall. “With many end-clients likely to impose blanket bans on limited companies from April 2020 onwards, and some, such as Lloyds, stating that they won’t even carry out status assessments, there may in fact be very little information available to HMRC as a direct result of these changes. The reality is that HMRC will already hold extensive information that might trigger enquiries.”
Enquiries aren’t the only weapon in the taxman’s arsenal. Though HMRC has claimed it will only use information to open a new enquiry into a contractor’s affairs if it suspects fraud, it has plenty of other available avenues. For example, the ‘nudge letter’ has been used liberally by the taxman in recent times.
Recently, it was reported that roughly 1,500 limited company contractors engaged with pharmaceutical giant GlaxoSmithKline (GSK) had received such letters accusing them of falsely operating outside of IR35. The letters go on to offer contractors who accept HMRC’s view the opportunity to calculate the supposed tax owed before making a deemed payment, or respond in writing by a certain date with reasons supporting their stance.
The indiscriminate manner in which these letters are issued makes it clear that the taxman hasn’t investigated the working practices of the recipients, and has led many to accuse HMRC of attempting to drive up tax revenues through scaremongering.
Take HMRC’s promise “with a large pinch of salt”
Ultimately, Hall advises contractors to treat HMRC’s comments concerning information gained from the Off-Payroll rules, and all accompanying guidance, “with caution and scepticism, as all HMRC pronouncements now must be”.
“For me, a policy paper promise such as this counts for very little. Trust in HMRC has sadly eroded over recent years, particularly within the contracting sector where its attempts to ‘maximise revenues’ are there for all to see. The suggestion that HMRC might ignore the possibility of recovering tax losses that it would project to be worth several billion pounds is to be taken with a large pinch of salt.”
Berry agrees, observing that HMRC’s assurances are in direct conflict with its aggressive pursuit of its primary objective, which recent changes to terminology have done little to disguise:
“HMRC was charged from 2016 with objective number one: ‘maximise revenues and bear down on tax avoidance and evasion’. Just before this years’ annual report was published in July 2019, HMRC dropped the word ‘maximise’ and replaced it with the much less objectionable word ‘collect’.
“But you can bet that behind the scenes, nothing has changed. HMRC is still tasked with collecting as much revenue as possible for a financially troubled Government.If I was a contractor who’d taken my chances with IR35 I’d be rather cautious about accepting the words of HMRC at face value.”