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In recent years, the way HMRC has policed tax and IR35 compliance among contractors has left a lot to be desired. Many individuals have been subject to tax investigations - often wrongly - as the Government looks to raise revenue from the UK’s self-employed workforce.
The ongoing pandemic has also brought the possible future tax treatment of freelancers and contractors into sharp focus. With a staggering £210bn spent so far on various support measures, many are wondering how the Government will look to recoup this.
While tax increases remain a possibility and IR35 reform in the private sector is rapidly approaching, the signs also point towards HMRC adopting a potentially aggressive stance on tax compliance.
The Government also claims as many as 9 in 10 contractors abuse the IR35 rules, suggesting that HMRC views this sector of the workforce as an area in which it can stamp out suspected non-compliance and in turn, earn money for the Treasury.
Assuming that the threat of a tax investigation is growing for various reasons, what can contractors do, if anything, to minimise the chances of being approached by HMRC?
Let’s take a look...
It’s important not to give HMRC any reason to want to open a tax investigation against you, regardless of whether you are confident that everything is in order and compliant. Given late company account submissions and, worse still, delayed or non-payment of business or personal tax returns are a surefire way to spark the tax office’s interest, do what you can to meet all deadlines.
Maintaining accurate and up to date accounts could also keep HMRC at bay. Regular mistakes on financial reporting, whether on VAT, Corporation Tax or Income Tax returns, could raise suspicion. And while errors may be the result of an innocent mistake, HMRC won’t hesitate to open a tax enquiry against contractors who regularly miscalculate things.
With an accountant taking care of your tax responsibilities you’re less likely to slip up when filing information with HMRC. The tax office actually prefers for businesses to have professional representation too, given accountants won’t accept non-compliant activity from their clients. So if you haven’t already, consider engaging a contractor accountant - it could prove to be a shrewd move.
Activity that HMRC might consider to be abnormal based on previous years’ accounts may spark a tax investigation. This could range from large fluctuations in income, information vastly different from competitors or recording low to no profit at all (meaning you pay little or no Corporation Tax). Of course, in the current climate, changes to turnover are easily explained, which you are encouraged to do when filing your tax returns.
Following the Loan Charge injustice, which saw tens of thousands of contractors handed huge retrospective tax bills, HMRC continues to clamp down on the use of disguised remuneration schemes. With this in mind, contractors should carry out thorough due diligence and only work through compliant umbrella companies. To find out the hallmarks of a disguised remuneration scheme, please click here.
The Government is of the opinion that IR35 non-compliance will amount to £1.3bn per year by 2023/24, which in itself suggests that IR35 may be a focal point of HMRC’s going forward. And while the arrival of reform in the private sector will mean contractors no longer carry the IR35 risk when engaged by medium and large businesses (as is the case in the entire public sector), that’s not to say HMRC will leave contractors alone. The tax office can enquire into engagements that ended up to six years ago, when individuals held the IR35 liability.
Given you can’t ensure your IR35 compliance on completed contracts, IR35 insurance will protect you. Meanwhile, for existing contracts, consider having your IR35 status reviewed by an independent expert. This will help make sure of your compliance and demonstrate that reasonable care has been taken when determining status - which is important in shutting down an IR35 enquiry or even discouraging HMRC from opening one.
Paying close attention to each of these should, in theory, lessen the likelihood of HMRC investigating your tax and or IR35 compliance. However, even with the best will in the world, there’s no way to rule out an approach from HMRC altogether. Seemingly random compliance checks are commonplace, and the tax office has started to target large numbers of contractors at once, as shown by the letters sent last year to 1,500 contractors engaged by GlaxoSmithKline.
This is why IR35 insurance policies could prove vital, offering you peace of mind and financial protection in the event that HMRC does decide to scrutinise your IR35 status or other tax affairs.
To learn more about Qdos’ leading tax liability insurance policy, which could prove vital if HMRC decides to pursue contractors, please click here.
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