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HMRC Tightens Screws On People Accused Of Abusing Contractor, Freelance Rules

Tom Burroughes

25 March 2014

The UK tax authority increased by as many as four times in the space of one year the number of investigations into people suspected of tax dodging through rules designed for contractors, figures show.

sharply increased the number of probes into people it alleges are abusing what are called IR35 rules on tax and national insurance (aka payroll tax) for contractors this year compared to the last, according to Bloomsbury Professional, a tax and accounting information group. It warned that the HMRC’s zeal for results could hit innocent people.

There were 256 cases in 2012/13, compared to just 59 investigations into IR35 in the previous period, the organisation said in a statement.

“HMRC’s attitude towards IR35 hardened following a small number of high profile tax evasion cases in 2012 involving senior executives in the public sector and BBC. However, this legislation affects everyone working on a contract basis, and it’s very complicated, meaning some honest freelancers are falling foul of the rules,” Martin Casmir, Managing Director at Bloomsbury Professional, said.

The rules were introduced by HMRC to target those falsely registering as self-employed for tax purposes. The legislation prevents contractors and freelancers from reducing tax and national insurance contributions through use of intermediaries such as “Personal Services Companies”, in circumstances where HMRC would deem them to be effectively working as employees.

The findings can be seen as part of a wider assault by the tax authority – at the behest of the current government – to crack down on individuals and companies it suspects of cheating on tax. In the latest annual budget presented last week in parliament by finance minister George Osborne, it included a by-now familiar push against tax dodgers.

Bloomsbury’s statement on the data said the steep increase in IR35 investigations could spell trouble for some freelancers as HMRC steps up its efforts on pursuing possible tax evaders.

Although two thirds of investigations conducted in 2012/13 yielded “positive” results for HMRC, some innocent freelancers are still being challenged unnecessarily, which is resulting in big bills for some, it warned.

“Minor oversights when agreeing contracts could result in a big financial blow for freelancers hit with an investigation by HMRC. Time consuming and extremely costly, the burden of an investigation can really affect a freelancer’s livelihood,” Casmir said. “A big worry now is that the fear of falling foul of IR35 will deter many from going freelance,” he said.

“That’s bad news for companies that prefer the flexibility of using contractors, and bad news for anyone put off building a portfolio career or using freelancing as a way to balance work with their family responsibilities,” Casmir continued.

The firm says that having yielded £1.1 million in 2012/13 from IR35 investigations, HMRC is likely to keep pursing freelancers in the hope of recouping further tax payments.