Contracting, take a long hard look at yourself to escape this vicious HMRC circle

Freelancers commanding a centre spread in the Financial Times at the weekend shows you something’s up. A double page in the centre of the newspaper’s Money supplement no less.

Unfortunately it’s justifiable, proportionate coverage because ‘contractors’ (more accurate than the FT’s preferred ‘freelancers’ which implies unincorporated, sole trader businesses) are up against it like never before.

Indeed, we’d go so far as to say that today’s numerous HMRC ‘clampdowns’(a word that newspapers can’t seem to use enough when describing the Revenue’s actions), will create a perfect storm.

This single, multi-layered, destructive scenario will be one in which contractors will, over the next five years, starting now, feel the power of a taxman seemingly determined to wipe out their crucial contributions to the UK economy and many of their livelihoods with it, writes Graham Webber, director of tax at HMRC dispute specialists WTT Consulting.

Are we about to see history repeat itself?

The only truism to make all this a tad less dramatic is that we’ve actually seen it all before. Back in 1999, IR35 was the new kid on the block. HMRC was internally confident that it’s new weapon would decimate the ranks of the non-compliant.

Well, for a couple of years in spite of IR35, contractors moved to limited company (PSC) vehicles. The rise (and rise) of employment schemes which were sold on the premise that not only were they “compliant” with HMRC, but also reduced the administration of running a company, followed. There, then, an arms race commenced. Disguised remuneration rules in 2010 were met with “self-employment” claims; changes in law in every subsequent year were met with ever more ingenious (and sometimes false) machinations of legal documents and money flows.

Today in mid-2019 – some 20 years since IR35 was introduced -- HMRC is on the verge of rolling out its latest attempt to ‘solve’ the issue of non-compliance. So again it’s IR35 – but it’s going to be strengthened; changed and redirected, and much more so than the technical, almost forgotten amendment to cover ‘office-holders.’

The perfect compliance storm contractors face

By design or accident, the Revenue also have a totemic case against Managed Service Companies; the strongest ability yet to mine employers/engagers for data and run smart risk assessment tools; and perhaps even more far-reaching, the 2019 Loan Charge.

This is the perfect storm for freelance contractors I mentioned at the outset. Or, if you’re more the Taxation-reading, civil servant type, the perfect compliance cocktail. Either way, the upshot is that professional, independent workers will, between now and 2024, be on the receiving end of an HMRC outwardly hell-bent on eliminating this crucial sector of the UK economy.

My crystal ball can now stay in its pouch, because history tells us what will happen next. We will see the rise of new structures and schemes that promise to counter the loss of take-home earnings -- the inevitable result of the above four-fronts attack. Just as we saw in 2003, these new versions of operating will seem like a shining light of commercial common sense. Beware however the false dawn that many will prove to be.

Money talks. Will it do so louder this time, with four fronts under attack?

Back in the early 2000s, operating as a contractor via a PSC could with some careful and sensible planning, net a contractor perhaps 80% of their invoices as ‘take-home’ pay. This required some shuffling of salary/dividends and perhaps some more exotic manoeuvres which attracted more paperwork. The net result however was HMRC got 20% of the invoiced sum and while they always wanted more (of course), this was probably in the ‘acceptable’ rate of recovery.

When the employment schemes and their later cousins arrived, the promoters were commercially-savvy. They realised that as long as the contractor still got 80% of invoices as their take-home, their proposition was attractive -- and that the money on offer would be 95% of the weight in the decision made to use their scheme. Money talks.

The promoter therefore started with a ‘pot’ of 20% of the invoices raised. From that, it paid them to reduce their costs as much as they could. The tax they reduced to 1% or less by paying salaries at or around the personal allowance or NIC threshold. Commissions to introducers were probably paid. The net result however was a fee to the promoter of perhaps 15% of the invoiced sum. Very neat. The contractor feels no pain, perhaps even some gain as they no longer have to do company administration. The promoter has used the tax rules designed to stop this activity, to make a very decent fee.

Over the years since, the equation has changed slightly as new promoters enter the arena and seek market share via a lower fee. On occasion, we also see claims of a “safer, more compliant” scheme that usually means “comes with an increased fee”.

This cycle of events will come to an end, however, because of the four-fronts attack. We will see a period in which shrewd contractors will leave behind structures and schemes and focus instead on more fundamental matters, such as being inside or outside IR35. We should be honest here too.

A significant population of freelancers have been scarred for life by HMRC enquiries. The blame for this can be laid at many doors. Blame is of no practical use however, other than to underline hard won lessons.

Right now, my fear is that those lessons have not been learnt and that many contractors, especially those entering this sphere for the first time, or who are driven to maximise what may be a peak in their earnings career, will again be tempted by the promises that have led to such misery.

What we see; what we MUST do

We already see “umbrellas” (surely never has a label been so abused), promising impossible take-home pay rates. We see promoters claiming that the use of “capital payments” can increase pay. We see the advent of “structured solutions” making 100% of a promise backed by only 30% of the facts.

All of them seek to repeat the sleight of hand exercised a decade and more ago, of focussing on that take-home figure. The view that these underhand operators take is that contractors will allow the size of their take-home amount to dictate their decision to use them – a decision that may often mean using something that contractors may not totally understand.

This cannot be permitted. The whole industry needs to take a long, hard look at itself. Those of us who make a living from contractors MUST come together and agree common standards. We MUST agree what an “umbrella” is and what it does. We MUST agree that transparency and full explanations of risks and rewards are the minimum that contractors deserve. We MUST be a more effective lobby with HMRC and regulatory bodies. We MUST ensure that those claiming to be advisers in this space are honest.

The unscrupulous will likely be more unscrupulous this time around

It should be noted here that I much applaud the efforts of many organisations who have already taken steps in this direction. We have in mind IPSE, APSCo, Professional Passport and the FCSA who have done -- and continue to do -- much good for professional freelancing.

We observe however that our world of contracting is changing. There is a critical imperative placed upon all of us working in this space to rebuild trust in the contracting community. Failing to do that will see again the rise of those unscrupulous enough to trade on the take-home pay tenet. And this time in earnest, with experience on their side. This trading, this exploitation of the take-home pay tenet can end only in a repeated financial disaster for contractors. And so it’s probably no surprise that the ‘Pink Un’ covered our world at the weekend. Its recent campaign opined ‘We Live in Financial Times’ -- nobody more so, I suggest due to the perils they face, than contractors.

Profile picture for user Graham Webber

Written by Graham Webber

Following nearly 4 decades working in various tax disciplines, Graham co-founded WTT to offer his deep experience and understanding of complex tax structures to those embroiled in tax enquiries. More recently Graham was awarded best forum adviser and best forum personality in the ContractorUK Awards.
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