Osborne hits tax scheme contractors, leaves the rest to persevere

Contractors in receipt of an enquiry notice or notice of assessment from the taxman were today hit by the Budget, in contrast to their counterparts engaged in “normal commercial transactions” who emerged unscathed.

As to why George Osborne did not impose any new red tape on the typical contractor, an accountancy firm said perhaps it was because such contract workers already have an extraordinary amount of measures to contend with.

Pointing to attacks launched at Autumn Statement 2013, such as the crackdown on false self-employment and the 'pay-up first' avoidance rule -- both of which Budget 2014 confirms will go ahead, DNS Associates said:

“As an accountancy firm serving contractors, we just feel that such professionals have enough to persevere with, as there are already a lot of things attacking them, whether it’s existing rules like IR35, or incoming ones like the accelerated payment power.”

The latter, known as the ‘pay-up first’ tax avoidance rule, will soon hit approximately 43,000 taxpayers who are in dispute with HM Revenue & Customs, relating to use of schemes under DOTAS or the GAAR.

These taxpayers, who have already received an enquiry notice or notice of assessment from HMRC, will be forced to pay the amount of tax in dispute before their case is tested in law – a move the chancellor says will yield £4billion.

The Low Tax Group, a specialist accountant for contractors, reflected: “It seems HMRC are trying to fundamentally change tax rules around disputed tax avoidance. If the law passes, the Revenue will have the power to dispute any DOTAS or GAAR tax case and impose the tax liability to be paid immediately.

“Effectively the Revenue would be saying to contractors and others affected ‘you owe us £X’, the taxpayer would argue they do not, but HMRC would have the power to say ‘pay the tax now and we will talk about it later’.”

Martin McKechnie, a director at the group, believes that arming the tax authority with this “very draconian” power will cause worry among contractors, given the department’s poor track record at assessing liabilities.

“We do have concerns, as HMRC have time and again proven themselves incapable of operating error-free, so contractors could be forced to pay over taxes when the Revenue has in fact made the mistake themselves.”

No To Retro Tax, which campaigned against the proposal, expressed disappointment that the Revenue has effectively been given a new arm to retrospectively grab tax that it, not a court, believes to be owed.

Alistair Renshaw, NTRT’s chairman said: “Any taxpayer with an open enquiry or who has used a DOTAS or GAAR scheme which is being questioned by HMRC will have to make an ‘accelerated payment’ and pay the money up front, before any arguments have been heard in the tax courts.

“The proposed changes, which we and others in the tax, accountancy and contracting sectors will be joining together to challenge, have effect from the date the Finance Bill receives Royal Assent, likely to be later in the summer.”

Mr Renshaw, a former accountant, also took issue with George Osborne making the proposal sound fairer than it actually is, or will be in practice.

The chancellor told the House of Commons: “If people feel they’ve been wronged, they can of course go to court. If they win, they get their money back with interest.”

The NTRT chair clarified: “You can only appeal on the grounds of process, i.e. the notice was sent to the wrong address, not the amount claimed or whether it should be payable.”

Nonetheless, objections to the new power for HMRC are likely to come in thick and fast, hinted Lisa Keeble, managing director of ContractorUmbrella, citing the government saying that it expects a “prompt range of different legal challenges.”

“Indeed comment has already been made by some that the measures will contravene the Human Rights Act”, added Ms Keeble.

“It will be interesting to see how quickly the legal challenges are made and whether contractors who were caught out by these tax avoidance schemes will wait for the outcome and risk penalties or will pay within the specified 90 days.”

Her comments relate to the fact that, under the accelerated payment rule, the taxpayer will be sent a ‘Notice to Pay’ requiring them to pay the tax in dispute within 90 days and penalties will apply if the notice is ignored.

Worryingly for affected contractors with investments, Budget 2014 also announces that HMRC’s recovery powers will be strengthened so that it can grab unpaid liabilities from bank and building society accounts, including ISAs.

Budget 2014 states: “The Direct Recovery of Debts will focus on debtors who owe at least £1,000 and have been contacted multiple times by HMRC to pay.

“A minimum aggregate balance of £5,000 will be left across all accounts, including ISAs, after the debt is recovered. The government will consult on the implementation of this measure shortly after Budget 2014.”

When combined, the ‘pay-up first’ avoidance rule and this stronger recovery power should significantly boost the government’s already impressive rate of tax collection through compliance.

In fact, according to the chancellor, HMRC is now collecting twice as much as it did previously through compliance, and the number of registered tax avoidance schemes (DOTAS) has fallen by half.

Meanwhile, the anti-avoidance rule concerning most contractors – IR35 – was not mentioned in Budget 2014, nor was the Personal Service Companies Committee, which is due to make its recommendations this month.

A spokeswoman for the PSC committee declined to be drawn on why its final report was not prepared in time for the Budget. She would only say: “The Personal Service Companies Committee was set a deadline of 31st March by the House of Lords, and will report back to the House by this date.”

Editor's Note: Further reporting, comment and analysis for contractors of Budget 2014 -

How Budget 2014 impacts contractors

What Budget 2014 means for contractors' pockets

No U-turn on company cars' tax-efficiency

 

 

 

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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