Empowering the Freelance Economy

HMRC scrutiny over freelancers on the rise

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What would trigger an HMRC investigation? Is it different for a limited company freelancer versus an umbrella company worker? And if your umbrella company or payroll service has been named by HMRC as a tax avoidance scheme, that’s also going into insolvency, are you more likely to be targeted?

Seb Maley, CEO of contractor insurer, Qdos, offers his insights into these pressing reader questions and the factors that could instigate an HMRC investigation.

Seb Maley, CEO Qdos

In theory, self-employed workers, such as freelancers and contractors, risk being investigated by HMRC at any time. The tax office launches a certain number of random enquiries every year, but freelancers who file their tax returns late or inaccurately – whether personal or business – are arguably at greater risk of a tax investigation.

Alongside this, it’s not unknown for HMRC to approach businesses having received a tip-off from someone who has reported unusual behaviour.

You also only need to look at the host of Sky and BBC presenters who have found themselves caught up in an IR35 investigation to realise that HMRC also targets certain industries and professions. For instance, having won a number of high-profile IR35 cases involving presenters, the tax office is clearly of the opinion that there is a high level of non-compliance in this space, whether rightly or wrongly.

Regarding umbrella workers who have worked via a tax avoidance scheme posing as a compliant umbrella company – regardless of whether they did so under the impression that it was perfectly legal – the chance of HMRC scrutinising the individual’s tax affairs seems to be high.

At last count, eleven tax avoidance schemes have been named and shamed on the government website. With this in mind, and given that individuals operating through them may not have paid the correct amount of tax, there is a more significant threat of a tax investigation.

Taking all of the above into account, and not forgetting that in the six months to December 2021, there was a reported 1062 tax investigations opened every day – a 9% increase – it’s essential that freelancers, contractors and umbrella workers are confident of their tax compliance and hold insurance to cover the costs of professional representation and potential liabilities during a tax investigation.

What does insurance actually cover if you get investigated?

Regarding insurance, a comprehensive tax liability insurance policy may be worth considering.

Qdos’, for example, includes up to £50,000 worth of defence costs in the event of a number of tax investigations. In time, should HMRC find that you owe tax, this policy offers up to £250,000 to cover resulting tax liability, penalties and interest.

Also worth pointing out is there is a misconception that if HMRC is investigating a freelancer or contractor then they should stop operating via their limited company and set up a new one in the meantime. This certainly isn’t the case.

Have a question or topic you’d like some expert guidance on? Get in touch by email or through The FI’s social media channels.

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