By Ashley Preen

August 19, 2016

HMRC using new powers to tax freelancers and contractors

Previous tax affairs being classed as “aggressive avoidance” by HMRC

HMRC’s new powers mean that possibly thousands of freelancers and contractors – those working in finance, IT, or oil and gas in the late 2000s, mostly – are being told that HMRC now see their previous tax affairs as “aggressive avoidance”.

It’s “pay now, ask questions later” for freelancers and contractors

HMRC is using its new powers to work out how much tax is owed from previous years, and are demanding that it be paid upfront. Many of the contractors targeted by HMRC’s campaign are being given a 90 day deadline to pay the equivalent of a year’s salary – most of the affected contractors earn £60-80,000 per year.

HMRC is only giving freelancer and contractors an opportunity to make a case that they don’t owe the demanded tax after they pay the high sums.

Affected are Contractors and freelancers who used Employment Benefit Trusts

The freelancers and contractors affected by HMRC’s campaign are those who used what are known as ‘Employment Benefit Trusts’. These schemes were run by large companies, but have only more recently become controversial.

An alternative to working through a limited company for contractors

Most of the contractors and freelancers who signed up to these schemes did so as an alternative to working through their own limited company, which is itself a legal and legitimate way of reducing tax paid by being paid with a mixture of salary and dividend payments.

However, most contractors worry about being caught out by IR35 rules, which are designed to stop people paying less tax as a contractor when they should actually be classed as an employee of the company they are providing their services for.

A promise to avoid falling foul of IR35 rules

So-called Employment Benefit Trusts were advertised as a way to avoid being caught out by IR35 rules while reducing the amount of paperwork and admin required by a contractor. However, as HMRC’s campaign against IT and finance contractors has shown, they were actually very risky tax arrangements.

Have you been caught out by HMRC’s campaign?

Pearl Accountants has specialist contractor and freelancer accountants who can help with the associated issues, such as IR35 rules. Get in touch by calling 020 8582 0076 or fill out our form.