There has been a lot of press comment recently in connection with the apparent abusive ‘tax avoidance’ undertaken by taxpayers providing their services via their own personal service companies. Ken Livingstone has had to address accusations that he has used such a structure to avoid tax.
In his 2011 Budget the Chancellor announced the proposed reform of ‘IR35’, the infamous rules which deal with the taxation of so called ‘one man companies’.
In the latest step HMRC has now published its 47 page ‘Intermediaries Legislation Guidance Note’. This is a clear statement of intent that HMRC mean to pursue this issue wherever possible.
We suspect that HMRC may view one man companies as easy targets where rich pickings are to be made if the commercial arrangements have not been set up and operated correctly.
The published note includes various business entity tests which are designed to build up a picture of how a contractor’s business works and how they provide their services. The tests will be one element in HMRC’s assessment of the likely risk of there being potential ‘tax leakage’ and whether HMRC then need to take further action. The tests consider various indicators to determine a contractor’s status, for example the ability or otherwise to send a substitute to carry out work in their place. Scores are given to each of the tests which are then used to categorise the contractor as ‘high’, ‘medium’ or ‘low’ risk of IR35 exposure – HMRC will then target businesses for enquiry accordingly.
The guide explains that the tests are not set in stone but are an extension of the risk-based approach which applies to all HMRC investigations. HMRC will have specialist teams in Salford, Edinburgh and Croydon to spearhead the initiatives in this area. It has to be appreciated that the scoring is a diagnostic tool and many disputes will only be resolved by reference to the plethora of tax cases on this issue which go back decades.
HMRC have confirmed that the IR35 overhaul will mean an increase in investigations. The onus will be on the taxpayer to satisfy HMRC that they are ‘low risk’ in order to close an investigation. Thus, if you are targeted for an enquiry it could be time consuming and costly to satisfy the taxman and send him on his way.
The proposed scoring system could see a number of small businesses falling in to the high risk category and thus be subject to closer scrutiny from HMRC.
If you are concerned with your own arrangements we can review your circumstances, against the various tests, to assess your likely risk level. This is no guarantee that HMRC will not investigate your affairs but it might give you an indication of the likely risk level and whether indeed changes could be made to your business arrangements so as to reduce the risk of a future enquiry.
If you would like us to carry out a review, please do not hesitate to speak to your usual contact at Burgis & Bullock.