“We are the 99%”, a political slogan used by the Occupy movement, refers to the concentration of income and wealth amongst the top 1% of population. It also reflects an opinion that the “99%” are paying a price for the choices of a small minority of the 1%. Following another leak from an offshore law firm, tax avoidance is back in the news and the Paradise Papers investigation by the BBC, Guardian and others has put the spotlight back on the 1%.
Who are the 1%? Public perception is of the rich, wealthy and elite – property tycoons and celebrities. Dangerously, HMRC appears to be widening this group with aggressive pursuit of contractors and the alleged tax avoidance they partake in.
Contractors as individuals, provide vital services, for example nurses and IT professionals. Forgoing traditional employment benefits and protections in exchange for greater flexibility and in some cases pay, they offer the UK economy a flexible and cost effective alternative to high employment costs on the balance sheet.
So, to what extent are contractors within the 1%?
In recent years HMRC has furthered the IR35 legislation in an attempt to reclassify contractors as employees, rather than allowing them to operate under ‘self-employed’ status. Under the guise of streamlining tax collection, HMRC views this as a helpful step towards making ‘Britain fit for the future’, but this has not been reflected in the real world. We see our daily lives impacted by shortages of NHS staff, increased waiting times, delayed public sector development projects and an increase in the skills gap; further exasperated by the unknown of Brexit, due in part by businesses being unable to hire short term project focussed staff, due to an exodus of contractors from the sector.
Contractors have been forced by potential clients to consider arrangements to stay outside IR35 or not having any work. This led to mis-selling by promoters promising contractors; “simplification”; ‘HMRC approved schemes’; higher take home wage. Schemes sold by advisors were typified by a contractor providing services to an end client via an agency who would deduct a small fee, and the contractor would receive a small salary as well as a ‘loan’ amount via an offshore trust, all to help the ‘everyday’ contractor working to earn a living, pay their mortgage and provide a comfortable life for their families – much like the 99%.
Footballers – amongst the 1%? In July, after a long running battle, the Supreme Court agreed with HMRC that EBTs used as a way of paying players, managers and other staff should be taxable like salaries. Thus, payment to the Trust should have been subject to deduction of income tax under PAYE regulations, meaning primary liability rests with the employer. Therefore, far from being tax avoiders themselves, contractors were falling foul of the ‘1% employers’ who failed to deduct sufficient tax. This was conveniently ignored in HMRC’s most recent release of information on disguised remuneration, keeping focus on the 99% not the 1%.
Yachts – owned by the 1%? In September, Les Voiles de Saint-Tropez welcomed luxurious vintage and classic Yachts; meanwhile HMRC welcomed advisers to a webinar to unveil a new ‘settlement proposal’ for loan based schemes. Questions raised by advisers were avoided by HMRC, leaving many agents lacking clarity on how to advise clients. In my view, nothing was unveiled other than HMRC’s dismissal of an opportunity to present a reasonable approach to settling enquiries which have been open for years; costing public money and time. Instead the Ranger’s decision was once again conveniently ignored, again leaving the focus unduly on contractors.
Formula 1– hosts of the 1%? In November, the Formula 1 Grand Prix set off south of the equator in Sao Paulo; whilst HMRC released its most recent piece- ‘Disguised remuneration; detailed settlement terms’. This was HMRC’s opportunity to present practical and clear guidance on settlement. What could have been the difference between collecting sums to reduce the multi-billion-pound tax gap and collecting arguably more than the tax due to meet a political pledge, meant the public lost confidence in the system. In addition it left many contractors feeling undue pressure to settle with the fears of Accelerated Payment Notices and the punitive 2019 charge on the horizon. HMRC presented a settlement analysis which, again, ignored the Rangers case and left contractors unable to end the misery of tax enquiry.
Furthermore, HMRC published legislation on the 2019 charge earlier this year indicating ‘all loans or debts from a disguised remuneration scheme will be taxed as earnings if they haven’t already been fully taxed or repaid on or before 5th April 2019’. Perhaps the most uncertain aspect of this is the inclusion of a tax on amounts received in years which have not been subject to an enquiry. This drives a stake into the heart of taxpayer legal protections. Retrospective in its application, the charge increases pressure on contractors, who, much like the 99%, are paying for HMRC’s failure to collect tax due from the employer. Is HMRC any longer, fit for purpose?
So what’s next? Whilst ‘the 99%’ are being hit hard by legislative change, retrospective taxation, bankruptcies, loss of skills and expertise in the market and the resultant mass exodus from the contractor economy, we have to consider where this leads. Evidence shows the public-sector is suffering and contracts are falling behind. This results in increased public expenditure including, ironically, HMRC closing regional centres. Loss of knowledge and expertise in HMRC, already more processor than expert, means crucial decisions are being taken in the dark. Many of our clients want to settle their tax affairs but, with terms which lack reasonableness, it suffices to say many are trapped, reflecting an opinion that the “99%” are in fact paying the price for the ability of the 1% to escape HMRC’s focus…