Empowering the Freelance Economy

Off-payroll has “fuelled” tax avoidance schemes and double taxation “flaws”

With the number of freelancers and contractors rising, the government 's latest consultation on Off-Payroll flaws is crucial/ Photo by Kindel Media
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This week the government is closing two consultations involving Off-Payroll legislation. Contractor sector experts offer thoughts on what needs to change to put the freelance workforce back on track

Two Government consultations involving Off-Payroll legislation close on June 22nd 2023. One is seeking to introduce harsher punishments for tax avoiders (i.e., contractors and umbrella companies) and the other will address the double taxation “flaw” in the off-payroll working legislation.

The consultations come months after an eye-opening report was published by IPSE suggesting the self-employed sector’s contribution to the UK economy fell by an estimated £25bn in 2022.

When the Freelance Informer reported on the findings back in February, the solo self-employed population remained stable at 4.1 million in 2022, however, the sector’s economic contribution plunged by an estimated £25bn to a total of £278bn – an 8 per cent contraction compared to 2021.

The findings were a “wake-up call” for government to change course on its agenda for the nation’s smallest businesses, according to the Association of Independent Professionals and the Self-Employed (IPSE).

Has HMRC’s inaction taken tax avoidance schemes off the hook?

“Off-payroll has fuelled the growth of the [tax avoidance] schemes which the industry
predicted,” says Crawford Temple, CEO of Professional Passport, an assessor of payment
intermediary compliance.

Temple says a cost-of-living crisis has also served as an incentive for workers to seek out ways of saving money, but they are often unaware of the dire financial consequences they will face in time.

“I would urge HMRC and the Government to listen to the experts who have taken the trouble to respond to this latest tax avoidance consultation,” he says.

Temple like many others that have expressed their opinions in The Freelance Informer, wants “more action and fewer consultations” to stamp out tax avoidance and protect contractors.

The lack of enforcement by HMRC simply gives the promoters time to make significant amounts of money, which is their driving factor. The workers are then left reeling in their wake and facing large tax bills. That is simply not right.

Crawford Temple, CEO, Professional Passport

“For far too long, the schemes have been allowed to thrive with the architects getting away scot-free whilst their victims have been punished,” he says.

Temple fears that HMRC’s failure to act quickly in the past could replicate itself.

“Looking to introduce more punitive measures for these criminals is simply a case of shutting the stable door after the proverbial horse has bolted. Enforcement is key,” says Temple. “A naming and shaming campaign is not good enough.”

Temple explains that the lack of enforcement simply makes the promoters “more blatant in their claims of
compliance” and they pedal the narrative that if they were doing anything wrong then HMRC would have shut them down promptly.

He continues, “The lack of enforcement by HMRC simply gives the promoters time to make significant amounts of money, which is their driving factor. The workers are then left reeling in their wake and facing large tax bills. That is simply not right.”

Double-taxation “flaw” has left a £300m tax loophole

Commenting on the double taxation flaw of Off-Payroll regulations, Dave Chaplin, CEO of IR35 compliance firm IR35 Shield says “The double-taxation flaw has been massively unfair on businesses which were facing tax bills four times more than the perceived underpayment of tax.”

“The fix should mean that the offset will be retrospective to April 2017, so any tax bills settled after April 2024 will ensure the correct and fair amount of tax is paid by the hirer, rather than the four-fold inflated bills they get due to the current flaw,” says Chaplin.

Chaplin explains that the legislation was enacted “without properly addressing tax offsets,” which has resulted in opening up a £300m tax loophole in the Treasury coffers.

“HMRC has disagreed with £300m of “Outside IR35″ determinations in the public sector, which means those contractors can fully reclaim all their tax, and pay nothing. Until the fix is made, each time HMRC enforces the rules in the public sector, they lose money. This must also be resolved,” he suggests.

The legislative oversight has resulted in suppression of the self-employed workforce at a time when it needs to be unleashed, to get the UK economy growing and thriving again.

Dave Chaplin, CEO IR35 Shield

Self-employed robbed of their right to be their own boss

Off-payroll rules for many contractors have stifled their earning power since the start of the pandemic and been forced to join unregulated umbrella companies.

“Moreover, due to the flaw, many contractors who should have had their right to stay being their own boss, had that right taken away from them, due to firms refusing to engage at all with contractors,” says Chaplin. Adding, “The legislative oversight has resulted in suppression of the self-employed workforce at a time when it needs to be unleashed, to get the UK economy growing and thriving again.”

Chaplin, however, remains confident that the fix in the flaw of this legislation will happen in the next Finance Bill 2024.

“And, about time too,” he says.

To learn more about how Off-Payroll rules and IR35 have impacted the freelance workforce and the companies that hire them, check out The Freelance Informer archives and sign up to our newsletters.

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