Whilst HMRC’s priority at the moment is to deliver the Government’s Job Retention Schemes and COVID-19 support, once we are over this current phase of the pandemic they will be given a key role in the economic recovery of UK PLC.
But what does that look like? More help to SME’s to get back up and running? Tax breaks for employers? Lower tax rates? Unfortunately, I suspect it will be the total opposite and instead, HMRC will be asked to increase the tax take, and quickly. So, what might that look like?
When Rishi Sunak announced the Job Retention Scheme, he was very clear that the quid pro quo was that the gap between what self-employed and employed pay in tax must be equalised. Whilst IR35 is strictly aimed at those employed by their own limited company, and therefore not self-employed, I think we can assume that the comment was aimed here, given that he also announced that the IR35 reforms would be delayed by one year as a result of Coronavirus.
It was already likely that we would see an increase in IR35 enquiries post reform, but with the staff already in place we can expect HMRC to now concentrate on those that have been operating outside IR35 for a number of years without any change in status or end client.
These have become a common approach for HMRC over the last few years, bringing together subject experts for short, high intensity bursts of compliance activity in certain risky and largely cash based sectors. Takeaways, tobacco and alcohol outlets, and adult entertainment venues have all been the focus of previous taskforces and have raised over £500m in additional tax revenues and could be seen as a good, efficient way to balance the Chancellor’s books.
One of HMRC’s preferred, and indeed cheapest form of activity, is to send letters to taxpayers alluding to the fact that they may not have been paying the correct tax and that they should review their affairs and put them in order. This is efficient not because it scares people into declaring something that is not subject to taxation, although I dare say that it does, but because it reaches a larger number of people than the traditional one-2-one enquiry approach – which was a HMRC hallmark for as long as anyone can remember.
This leads to many more people bringing their affairs up to date and paying their back taxes believing that HMRC was aware that not all is as it should be on the self-assessment return. However, it must be said, HMRC’s data is not always as ‘clean’ as is should be when taking such action. It is possible to receive such a letter when your affairs are in order leading to considerable anguish and stress.
Unfortunately, with the IR35 reforms, we saw an increase in dubious schemes aimed at contractors. They offer to pay you in loans, share sales, annuities, and other weird, and quite frankly, deeply flawed arrangements that aim to change employment income into some form of non-taxable or lower tax rate asset. We have even seen some schemes shamefully targeted at those bravely returning to the NHS to help fight this pandemic. Quite frankly, there will only be one winner here. It will be those selling these ludicrous schemes who will be paid their fees. Meanwhile, HMRC will chase the unsuspecting user for the lost tax.
If someone was to offer you a risk-free investment yielding 20% we advise you to question everything they say and then cross-check the information with a trusted third party. If you have any doubt over a tax-related issue, then ask an independent adviser. You can be sure HMRC will continue to challenge any arrangement that artificially reduces your earnings or converts it into something it really isn’t.
The hidden economy
The lockdown has caused many to turn what has perhaps been considered a hobby up to now into a more full-time source of income. Many may have already registered their business for tax and national insurance or aim to do so by the 5 October deadline for 2019/20. However, many do not realise that just because they considered it a hobby previously, maybe producing a small profit as a so-called “side hussle”, does not mean that it should not be taxed as a trade – now and in the past.
Whether something is taxable as a trade has no relation to how you see the activity or the income it produces. Instead HMRC will apply the “badges of trade” to decide if the activity is a trade or not;
- profit seeking motive
- the number of transactions
- the nature of the asset
- existence of similar trading transactions or interests
- changes to the asset
- the way the sale was carried out
- the source of finance
- interval of time between purchase and sale
- method of acquisition
We therefore may see HMRC using the information they receive from the likes of eBay to establish if there has been a longer period of activity than now being declared.
Tax is complicated. Often it is the last thing on the mind of those trying to keep their business afloat and for those supporting themselves and families through difficult times. This will not be at the forefront of HMRC’s mind when they are turned back to their role of tax collection and the pressure from The Treasury will flow to the front line. As always, if you need help and support in dealing with HMRC please get in contact for a confidential no obligation chat.