Shock tax bills part of HMRC plan to “kill” contracting

Shock tax bills part of HMRC plan to “kill” contracting

HMRC’s latest compliance crackdown could set a damning precedent for the contracting industry, market participants say

Shock tax bills part of HMRC plan to “kill” contracting

The recent spate of tax bills sent to contractors by HMRC is the latest in a string of attempts to disincentivise flexible employment in the UK, according to Ciaran Woodcock, director at specialist accountancy firm Churchill Knight & Associates.

“For several years now, HMRC has been looking to kill the benefits of contracting and make everyone be PAYE. For some reason, they can’t understand that one of the most thriving parts of our economy is effectively being wiped out.”

On March 15, HMRC distributed income tax bills of up to £50,000 to 1,000 contractors in the UK, in addition to letters accusing their accountancy firm, Churchill Knight, of breaking Managed Service Company (MSC) legislation.

Churchill Knight denies HMRC’s allegation.

Introduced in 2007, the MSC legislation is considered adjacent to IR35 rules – it stipulates that company directors be treated as employees for tax purposes to prevent them from avoiding liabilities.

As a result, it seeks to ensure that contractors run their own limited companies, penalising those who outsource to advisory firms.

But Woodcock argues that the legislation is deliberately designed to be broad in order to catch out innocent firms and contractors, calling HMRC’s recent compliance activity a “fishing expedition”.

“They’re basically targeting any specialist that behaves as any accountant would. We’ve done absolutely nothing that’s any different to most people in the marketplace.”

The letters received by contractors state that HMRC has utilised “best judgement” to arrive at these conclusions. For Woodcock, this is an excuse to avoid providing an explanation.

“What that effectively means is they’ve made it up,” he says.

The letters also stipulate that the liabilities, which range from £14,000 to £50,000, must be paid within 30 days.

An HMRC spokesperson said: “We rightly take action against the use of avoidance schemes, which artificially reduce the tax people owe. Such action follows considerable evidence gathering and expert advice.

“People who work like employees must pay tax like employees. The MSC rules prevent an intermediary company setting up a structure that facilitates tax avoidance.”

Nicole Slowey, director at advisory firm Qdos, noted the convenient timing of the compliance for HMRC, echoing Woodcock’s view that the broad nature of the legislation has been taken advantage of.

“The timing is not necessarily surprising. With where we are fiscally, you can understand the government’s drive to do everything it can to push the point around compliance and recoup as much as possible.”

But Slowey also argues that firms and their clients must see the crackdown as a warning and an opportunity to tighten up on compliance.

“Any activity like this prompts contractors and their service providers to pause and take stock.

“These types of organisations should be looking internally and conducting some form of assessment. There’s nothing to say that HMRC doesn’t have other targets on the horizon at the minute.”

The case is highly likely to go to the tax tribunal, where HMRC will attempt to prove that Churchill Knight is a managed service company provider.

“Widespread” impact on the contracting industry

Woodcock stresses the potential wider significance of the “unprecedented” case, arguing that a victory for HMRC could strike a crushing blow to the contracting industry.

“Every single accountancy firm in our industry works in a very similar way, so you can imagine what they’d be able to do if they were able to get that through a tax tribunal as case law.”

Just one piece of MSC-related case law currently exists. In May 2016, HMRC was victorious in its pursuit of Costelloe Business Services (CBS), an advisory firm accused of being an MSC that encouraged tax avoidance.

According to HMRC, the total tax protected in this case amounted to £378,000. CBS denounced the verdict, arguing that it was not “involved with” the personal services companies among its clients.

But Slowey argues that this case “isn’t representative of these types of arrangements” and is “very extreme”, further highlighting the potential significance of the Churchill Knight case.

“If it goes all the way through, it will give HMRC two pieces of significant case law which you could argue would apply to 85% of the contractor accountancy market.

“You’re talking hundreds of thousands of individuals at this point.”

The potential impact of such an outcome on the economy at large could be huge, says Slowey, arguing that due to measures such IR35 and the Loan Charge, contracting is becoming “less and less attractive”.

“It’s a significant deterrent for individuals to come into the flexible workplace, and the wider commerce effect could be quite seismic,” she adds. “We already have a skills shortage as it is.”

In a report released by the Department for Digital, Culture, Media & Sport in 2021, one in seven businesses said they do not think they have the skills they need.

The report also clarified the extent of the data skills gap, estimating that as many as 234,000 such roles may need to be filled.

But for Woodcock, the most troublesome element of HMRC’s crackdown is the potential effect on the mental health of contractors.

“They are hurting people’s mental welfare by being flat-track bullies. I’ve spoken to some people, and I’m genuinely concerned about them,” he says.

“HMRC doesn’t care. It’s so poor in terms of how they’re handling it.”

HMRC has encouraged anyone who is worried about paying what they owe to contact them.

“We will always work with taxpayers to try to set up an affordable payment plan that will enable them to resolve their tax affairs,” an HMRC spokesperson said.

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