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Contractors face £1 billion tax bill

Contractors face £1 billion tax bill

Contractors look set to pay back at least £1 billion in tax to HMRC after their true earnings were disguised for years in avoidance schemes, The Times has revealed.  

The report states that some 20,919 contractors have so far come forward and told HMRC that they allowed their financial affairs to be managed by offshore-based umbrella schemes. These schemes collected wages on the contractors behalf. They then paid them in non-repayable loans, hiding national insurance and income tax liabilities.

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It is thought that contractors and freelancers who have taken part in these schemes each owe an average of £50,000. This is due to be paid back to HMRC in full. However, they will be able to arrange to pay it back in installments, over several years.

Another 30,000 contractors are expected to come forward before 30 September – the deadline to avoid high loan charges on top of what they already owe. According to The Times, the taxman has already settled bills with another 5,000 contractors and freelancers, worth £500 million.

Illegal schemes are still out there

The Freelancer & Contractor Services Association (FCSA) – a professional membership body in the UK dedicated to raising standards and promoting supply chain compliance for the temporary labour market – has come forward saying that contractors must be wary of any schemes which promise to reduce tax and national insurance contributions.

“There are now a number of schemes that are aggressively targeting professional contractors in the public sector to sell their product of higher take-home pay,” Julia Kermode, FCSA’s chief executive, said. “They ‘work’ by paying a small portion of your earnings via PAYE and then disguising the remaining larger part of your income as something else. This is often an offshore loan. Most of these schemes are illegal.”

She added: “By using such a scheme, you put yourself at significant personal financial risk. HMRC will usually backdate any charge for unpaid taxes to the date that you signed up to the scheme. Once fines and interest is added then your total tax bill will be extremely large.”

Public sector workers targeted

Kermode offers freelancers the following advice about these schemes:

  • Don’t believe anything that they tell you.
  • Just because they state they are compliant with HMRC, that does not mean that they are.
  • Avoid anything stating “HMRC Approved” as HMRC does not approve anything.
  • They will lie in order to entice you to their scheme.
  • They will not support you if HMRC investigates.
  • Are deliberately and aggressively targeting susceptible workers who have had their income reduced as a result of tax changes in the public sector.

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