HMRC’s missed trick is failing to find PSCs as tax-led

It should be welcomed for laying to rest a big myth that the taxman likes to perpetuate, but research on his behalf into why people incorporate doesn’t surprise me, writes Martin McKechnie, a director at contractor accountancy firm The Low Tax Group.

Indeed, we regularly incorporate companies for contractors and freelancers and very rarely are these hard-working people opting for ‘Ltd’ for tax purposes. Normally, we find that any tax benefit is a secondary consequence and, as the study for the Revenue found, not a motivator.

It is quite concerning to me that there is an obvious bias in the research for Her Majesty’s Revenue & Customs. It is that the qualitative interviews were only conducted with business that “indicated their decision to incorporate was influenced by potential tax and national insurance savings.”

So, as if we all needed proof, HMRC is showing itself in this research methodology to be hell bent on accusing legitimate contractors of tax avoidance. Not for the first time unfortunately, the department is close to demonising a vital sector of the flexible labour market, despite the polled representatives of that sector tending to act within the spirit of anti-avoidance rules.

While we as a firm of accountants welcome the study, it suggests to us that HMRC are desperately trying to find a way of taxing contractors more, rather than reducing their administrative burden. For example, the report (on page 6) trumpets the current parliament’s cut in corporation tax from 28% to 20%, designed to increase the UK’s competitiveness. The research offers only a mere footnote to set out that because pollster Ipsos MORI quizzed micro and nano-businesses, such companies have seen no benefit whatsoever from this cut, as only firms making upwards of £1.5million were affected.

The taxman should be learning to support contractors rather than vilify them, especially if his priorities – ‘encouraging businesses to grow’ and ‘reducing costs for firms’ – are to be believed, let alone achieved. The evidence has always been around to show that personal service companies are more often than not the most practical way for contractors to operate and any tax advantage is a secondary benefit.

If HMRC still doesn’t understand such evidence, which the ‘Reasons behind incorporation’ study underlines, here it is, at-a-glance in plain English:

  • Most contractors enjoy the flexibility afforded through managing their affairs in a limited company; and
  • A contractor takes on increased risk in the length and continuation of their contract; and
  • The contractor should therefore be entitled to manage how they handle their own remuneration throughout the year.

This choice over payment method is not a suspicious-sounding financial “strategy,” but the department, or perhaps its researcher, would have you believe so.

It is interesting to note that the study validates the comments made by expert witnesses to the House of Lords’ PSC Committee. That inquiry was another source of evidence showing that contractors aren’t tax-led to PSCs. But whilst HMRC are disapproving in the study of financial “strategies” (see pages 48 & 68), it is unreasonable to claim that the legitimate management of a limited company is a financial strategy. If anything,  so-called ‘financial strategies’ would apply more to umbrella companies rather than their ‘Ltd’ counterparts, especially in light of the recent tribunal finding against recruitment giant Reed.

Overall, it seems to me that this study needed to be conducted because HMRC did not have the evidence to back up their insinuations to the House of Lords that PSCs are used primarily for tax purposes. Now that HMRC’s own research proves this is not the case, its officials will no doubt be feeling as if they’ve missed a trick, but I do hope that this matter can now, finally, be put to rest. The Revenue would be better of tightening up on the tax affairs of large businesses, rather than victimising the very contractors and freelancers who are putting all hands to the pump in the engine room of the UK economy as it returns to growth.

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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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