This announcement follows a clamp-down on managed services companies that provide supposed ‘tax-efficient’ solutions to contract workers by paying them in dividends. All of these measures suggest a wider crackdown on the black economy, with significant ramifications for anyone who does not adhere to tax legislation, either knowingly or otherwise.
Our recently commissioned independent research has revealed that over half of the freelance/contract sector does not have a clear understanding of taxation laws or their personal accountability in the eyes of HMRC.
“While the outcomes of court rulings have favoured individuals, we are now witnessing a turnaround in this trend,” commented Minesh Gandhi, Tarpon. “This has implications for a significant proportion of almost a million workers in the UK who work on a freelance/contract basis and may not be paying the correct amount of tax - many of them without realising it.”
As HMRC looks more closely at individuals’ offshore bank accounts, it is perhaps inevitable that offshore limited company schemes (including composites) will be reviewed in the future. This has been reflected in the Finance Act 2004, which states that all schemes administered in the UK and that provide the opportunity to avoid paying the correct level of UK tax have to be registered with HMRC as a means of monitoring the situation. It also adds weight to HMRC’s indications that it will seek to recoup revenue from others using tax loopholes.
“Whilst there may be many individuals who either understand tax legislation or pay for ‘creative accountancy’, our research demonstrates that there are many more who are simply unaware of their taxation obligations,” explained Minesh. “However, this is no excuse in the eyes of HMRC as individuals ultimately have responsibility for their own tax affairs – this cannot be transferred onto their accountants.”
He continued: “At present this whole area is a minefield, particularly for contractors, as unscrupulous providers of management services leave many of them unwittingly vulnerable to investigation.”
Tax evasion is firmly on the government’s radar and greater scrutiny will certainly benefit the contracting sector as a whole, provide greater clarity for contractors and help to reduce the number of non-compliant providers in the industry.
Also, for those already working with employment management companies such as us, this doesn’t have to be a concern; our services help contractors by removing their taxation, legal and administrative burdens both effectively and legitimately.