Taxman is doggedly pursuing abuse, not contractors

Contractors would be forgiven for thinking that the taxman is unfairly picking on them if the announcements at - and following - Summer Budget 2015 are anything to go by, writes Paul Gough, managing director of Intouch Accounting.

After all, the contractor sector since the July 8^th Budget has heard about little else other than:

• the removal of tax relief on travel and subsistence;
• tighter controls over the application of IR35;
• the removal of the employer's allowance where a sole director is the only employee; and
• a tax raid of 7.5% on dividends.

Explanations that the contracting sector has been given for what it regards as attacks on four separate fronts are varied. One from HM Revenue & Customs is that it wants to “level the playing field”.

HMRC wants to do this with employees and the self-employed – it said so at the Budget, and afterwards on pages 2 and 6 of the IR35 ‘discussion document’. The Revenue has also spoken of levelling the playing field in relation to denying expenses for contractors under Supervision, Direction or Control (or the right of SDC). And if further proof were needed that he’s got a penchant for everyone operating on a pitch of equal gradient, the taxman said back in January that his reporting requirements for onshore intermediaries were designed to “level the playing field between compliant and non-compliant agencies.”

While the sheer repetition might be enough to irritate some, contractors and freelancers who are genuinely in business on their own account should actually take heart. That’s because it’s very clear that abuse is HMRC's primary target.

Not convinced? Well, if you look closely at the recent volume of discussion documentation, recommendations within consultation documents and the action taken in the 2015 Budgets, one can see a clear scrutiny of schemes which abuse legislation and arrangements suited to the engager, less so the worker.

For example, ‘salary-sacrifice’ umbrella companies which circumvent national minimum wage, or make use of fictitious expense claims to receive tax-free income; or those that use a zero-hour contract to avoid employer's National Insurance; or even break down employment units to claim National Insurance under the Employer's Allowance scheme, are ALL seen as abusing the rules. In doing so, these rogue operators are exploiting the vulnerable and conferring a tax advantage to the engager – sometimes the worker, which constitutes abuse of tax rules. Protecting both the exchequer and the vulnerable do seem to be consistent objectives of HMRC.

In trying to achieve them, the tax authority regularly claims it is doing, or will do, its utmost to protect the dynamic entrepreneurial. If then you are a contractor or freelancer who trades through your own Personal Service Company (PSC), and you are outside of IR35 – i.e. not deemed to be a disguised employee, then you can continue to be able to claim tax relief on travel and subsistence claims when travelling between home and any temporary workplace. Going forward, and under the new proposals as they are currently suggested in the IR35 discussion document, to be treated as outside of IR35 you may only need to confirm (or perhaps get your engager to confirm) that you are not engaged subject to a right of Supervision, Direction or Control by the engager.

So for contractors and freelancers genuinely in business on their own account who provide specialised skills based on their knowledge and experience to the engager, a PSC remains an attractive way of enjoying flexibility and limited liability. The latter is why most people incorporate.

The fly in the ointment is the additional taxation on dividends, applying to all dividends from 6th April 2016. This will hit all family companies and close companies including PSCs who have become used to the fact that dividends (investment income received) are not subject to National Insurance. It has been explained as the price we must pay for reduced rates of corporation tax but, to many in our sector, it is being seen as the first step in removing the fiscal advantages of being a personal service company.

It seems that only time will tell if we are at the beginning of a conspiracy against PSCs or, as I suspect, that we have a chancellor who is keen to raise taxes to pay off debt and a taxman who wants to protect the vulnerable and stamp out abuse of the Exchequer wherever he thinks it exists.