There’s been a wonderful example this week of exactly the kind of problem we contractors are faced with when trying to get our point across. A government agency, SLC– which is basically a private firm owned by HMG – was having some operational issues, so they brought in an expert, a Mr Lester, to sort them out. He was proving to be quite good at it, so they offered him a two year deal. Which he accepted. So far, so good.

The original work was done as a bog-standard interim management role: the guy was not employed, he did the job and charged a fee. When the two year deal turned up, he said fine, can you continue to pay me gross to my existing Limited Company and I’ll sort out the rest.

And then it all starts to go a bit wrong.

Someone – doubtless someone with just enough knowledge to be dangerous – asks exactly why Mr Lester has been allowed to avoid paying his taxes. Shock horror! Let’s do a TV programme on it!! This is outrageous!!! Lets’ have a witch hunt and track everyone else doing the same thing!!!!

Yes well, hang on a minute. Firstly we have zero evidence what taxes Mr Lester is paying, since he’s not obliged to disclose that information. There’s no evidence he isn’t paying quite a lot in tax; certainly, like many well paid contractors, a lot more than the average worker. He may even (say it quietly) have declared his earnings under IR35. Who knows?

His is a perfectly straightforward and entirely legal way to operate his company, to share his income with his other half and generally behave like the other 1.5 million freelance workers in the country. Like that chap who earns a million or so a year from public speaking. You know the one, David Milliband, sometime brother and elected, serving MP. Or indeed, the unloved Mr Brown who does the same with his outside earnings, although in his case they all go to charity.

It’s also interesting to note that various senior people had to sign off the arrangement whereby Mr Lester was paid gross. One might think that they had a handle on such things, but I could be wrong. And it’s all a bit moot now anyway, since Mr Lester has done the honourable – if arguably unnecessary – thing and gone on the payroll like the rest of the wage slaves.

But we can glean some interesting insights from this débacle.

Firstly, there are clearly a lot of senior people, including some who are actually in charge of such things, who don’t have a Scooby about how contractors work and how they are paid. Basically they do not trust a usually intelligent and highly skilled worker to arrange his affairs so that all taxes due are paid in full and on time.

Secondly we have once again seen the conflation of avoidance and evasion. Yes you can be against avoidance, but it’s not illegal; quite the opposite, in fact, it has long been sanctioned as an acceptable practice. You want evasion? Fine, so make whatever it is illegal and you’ve got it, but being tax efficient is avoidance, not evasion, and perfectly fine.

And finally, someone can’t actually count. Mr Lester will finish his contract and leave. No pension, no golden handshakes, no extended period on full pay while he finds a new job. That’s quite a chunk of public money saved over a full time employee. In fact, if you do the sums based on the figures that have been published, this tax saving exercise of moving Mr Lester on to the payroll will actually cost several tens of thousands more that if they’d simply left things alone.

But hey, nobody ever accused either HMG or the fourth estate of being financially competent, did they.

And what grates is the underlying point that people who should know better simply fail to recognise that there are freelance contractors among us. People who keep the wheels turning, who make few demands on the state, who represent an efficient and cost-effective workforce. People who are a long way removed from those who create companies for no other reason than to avoid paying taxes on earnings that they wouldn’t have got at all were they not already on the public payroll. You know who you are.

So bring on the witch hunt. But please, break the habits of a lifetime and point it at the right target…

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Image: Getting insight by Miran Rijavec

UK Uncut has started formal legal proceedings in a bid to reverse HMRC’s decision to let Goldman Sachs, the investment bank, off paying up to £20 million interest on its tax bill.

A few days before Christmas, the action group logged an application in the administrative court calling for a judicial review and claiming that the Revenue has tried to avoid giving details of the deal to the Public Accounts Committee.

The Revenue has admitted that a mistake was made in the agreement. According to a National Audit Office estimate, the Exchequer lost between £5 million and £8 million because of the error. However, an HMRC whistleblower said the loss was nearer to £20 million.

UK Uncut Legal Action released a statement saying a judicial review to reverse the decision was in the public interest and Goldman Sachs should be forced to reimburse UK taxpayers with the £20 million.

Law firm Leigh Day & Co is supporting UK Uncut and will be representing them on a no win no fee basis. Richard Stein explained that the lawyers wrote to the Revenue last October asking them to reverse the decision and reclaim the money from Goldman Sachs, which is one of the richest banks in the world. However, HMRC chose not to respond. The legal firm followed up their request in November and the Revenue replied saying it needed more time.

HMRC, and Dave Hartnett in particular, came under a lot of criticism last year for treating large companies more favourably than other taxpayers. If individual taxpayers are penalised for late payment, surely large corporations should receive exactly the same treatment.

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In addition to HMRC’s relentless campaigns to tackle tax evasion, the Revenue has also been targeting sectors that exploit interns.

The latest campaign targets designer labels and fashion houses suspected of not complying with National Minimum Wage legislation.

Fashion houses that took part in September’s London Fashion Week will be receiving a letter from HMRC reminding them that they need to adhere to regulations and pay their interns at least National Minimum Wage.

The Assistant Director for the National Minimum Wage, Michelle Wyer, said fashion houses are being given plenty of warning to put things right if they have not been sticking to the rules. Paying less than the NMW is not acceptable and firms that have been doing so should put things right now before Revenue investigators come knocking on their door.

Compliance visits will commence early next year and companies found to be breaching NMW regulations will be fined 50% of the underpayment and face possible prosecution.

There is evidence to suggest that interns are unlikely to come forward and complain that they receive less than the national minimum wage. HMRC is therefore targeting the trade sectors that are known to use interns in a bid to ensure compliance.

Ben Lyons from InternAware explained that the current system clearly breaches NMW legislation and many interns are being exploited. This exploitation is particularly rife in the fashion industry where most of the staff in some firms are unpaid interns.

However, John Miln, the UK Fashion and Textile Association’s acting chief executive, believes HMRC is picking on the fashion industry unfairly. He pointed out that the Revenue should also be addressing the problems of unpaid internships in media and political circles.

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Tax evasion is a global problem and a recent report from the Tax Justice Network shows just how bad the problem is.

The Tax Justice Network analysed tax evasion in 145 countries around the world and discovered that it cost the global economy in excess of $3.1 trillion. That equates to 4.9% of global GDP!

The USA heads the tax evasion league table at £337 billion, followed by Brazil, Italy, Russia and Germany. The UK comes in at No. 9. The data suggests that the exchequer loses £69.9 billion to tax evasion each year – that’s almost 80% of the entire NHS budget.

The report, compiled by forensic accountant Richard Murphy, also showed that 87% of Europe’s total budget for healthcare is lost to tax evasion. In Africa, the percentage is 98% and South America loses a whopping 139% of its healthcare budget to tax evasion.

Despite a G20 pledge 2 years ago, little has been done to stop companies avoiding tax by transferring their funds to secret tax havens. The Cayman Islands, Hong Kong, Luxembourg, Switzerland and the US have all been considered safe places to stash secret funds.

The UK government is keen to stamp out that practice and it hopes the recently signed Anglo-Swiss deal will capture the assets of UK residents who have secreted their money in Swiss banks. Other countries are now trying to negotiate similar deals with Switzerland. HMRC has also set up the Liechtenstein Disclosure Facility so that taxpayers can declare previously unpaid taxes without risking criminal prosecution.

However, tax evasion is going to remain a problem until all countries around the world agree to tackle it. At a time of global economic crisis, $3.1 trillion is an awful lot of money to be losing to tax evaders!

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Image: Look into my eyes…. by Johan J.Ingles-Le Nobel

HMRC is rubbing its hands together in glee after increasing the amount it collects from its compliance work.

In the last 12 months, HMRC’s income from investigations into tax avoidance and tax evasion rose to £16.5 billion. That’s a 37% increase on the last financial year.

Accountancy firm UHY Hacker Young said the increase was a result of the taxman adopting a more aggressive approach. Enquiries into corporation tax provided the Revenue with £4.6 billion, whilst VAT inspectors brought in £6.2 billion – up 92% on the previous year.

According to UHY Hacker Young, the government believes that if it keeps on investing in tax inspectors, the extra money will continue to flood in. In reality, a lot of businesses settle up because they feel intimidated by HMRC.

Roy Maugham said the Revenue’s aggressive stance is going some way towards helping reduce the budget deficit. However, the downside of this is that the Exchequer will find it harder to work out the total cost of compliance and the UK will become a less attractive place to do business.

A lot of UK companies have already moved their headquarters overseas to countries like Ireland, Malta and Switzerland, he continued. They have done this to escape the high business taxes in the UK and HMRC’s aggressive attitude to tax collection.

The Treasury could lose out in the long run as the lost revenues from companies relocating overseas outweigh the revenue brought in from increased compliance activity, Maugham concluded.

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As if the Chancellor hasn’t got enough on his mind trying to keep the UK from dropping back into recession, lawyers from the European Commission are unhappy about the recent Anglo-Swiss tax agreement.

According to the lawyers, the deal breaches European Union laws that take a tougher stance on tax evasion. George Osborne has been told to renegotiate the recently signed deal or be sued by the EU.

The new agreement protects the secrecy of UK residents who have Swiss bank accounts in return for a withholding tax and a large percentage of their capital.  The German government has also brokered a similar deal for its citizens and has now entered into new talks with Switzerland.

However, the EU claims the deal goes against the European Union Savings Directive. The EU’s tax commissioner, Algirdas Semeta, explained that if the problem cannot be easily resolved, the EU will have to pursue the matter through the courts.

Meanwhile, the Institute of Directors has said the UK government is not doing enough to attract overseas investors. The country’s tax system needs to be more competitive and the coalition should introduce incentives to encourage foreign businesses to invest in the UK and help fuel job growth.

The IoD’s director-general, Simon Walker, said the UK should be seen as the country of choice for international investors, and somewhere with a tax system that favours enterprise and hard work.

The tax system we have at present puts us in the middle of the 34 OECD nations, not in the front, he added.

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Contractors who own holiday homes abroad need to be aware that HMRC has set up a new team of tax investigators to look into possible tax avoidance. The Treasury hopes to net at least £500 million from this new initiative by 2014-15.

The “affluent unit” team will consist of 200 investigators and specialists will use software to search through publicly available information in the hope of identifying people who own overseas property and who should have been paying income tax on rental income, or if a property has been sold – capital gains tax.

The investigators will make use of “risk assessment” tools in order to highlight individuals who do not seem to be declaring the right income and gains, as well as those who do not appear to have been able to afford to buy the property legitimately.

Owners of holiday homes will also be asked how they funded the purchase and whether they are declaring it as a source of income.

An HMRC spokesperson said the affluent unit would be targeting individuals with assets of at least £2.5 million, as well as those who should being paying the top rate of income tax. The unit will be modelled on the High Net Worth Unit, which brought in £247 million in its first two years.

This focus on overseas homes is another part of HMRC’s wider crackdown on tax evasion. David Gauke, the exchequer secretary to the Treasury, explained that HMRC has demonstrated increasing success in tackling tax evasion at home and abroad. The government is giving out a clear message that tax cheats no longer have anywhere to hide.

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Accountants for contractors may be interested to learn that HMRC has launched a new taskforce to tackle tax evasion in the scrap metal industry.

The taskforce will target scrap metal dealers north of the border. The Revenue believes that this is an industry where the risk of tax evasion is high.

Last week, HMRC announced that it had set up five new tax evasion taskforces. In addition to targeting Scottish scrap metal dealers, self-employed construction traders in North Wales and the North West of England will come under the spotlight.

Another taskforce will investigate taxpayers in the South East who fail to submit Corporation Tax, VAT, PAYE and self-assessment returns. A further taskforce will investigate Scottish fast food outlets suspected of falsifying records.

Finally, landlords in North Wales and the North West, who have at least three properties and are suspected of evading taxes, could find a taskforce inspector knocking at their door.

The Exchequer Secretary to the Treasury, David Gauke, said the government does not tolerate lawbreakers. HMRC can and will track down tax evaders, no matter who they are. They will receive heavy fines and criminal prosecution could be a possibility.

In last year’s spending review, the government allocated £917 million to combat tax crime. It hopes this funding will raise an additional £7 billion per year by 2014-15.

HMRC intends to have 12 taskforces in place by the end of this financial year and says more will follow in 2012-13.

The Revenue has also set up a Tax Evasion Hotline where members of the public can phone and report anyone suspected of tax evasion.

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Image: Scrap metal T-rex created by Bundaberg artist John Olsen by roskomcqueen

Contractor accountants will no doubt remember that HMRC established a task force earlier this year to investigate restaurants suspected of tax evasion.

Since the inception of the task force in May, the revenue has started investigations into 531 businesses.

When the task force was first announced, HMRC said it would be targeting high-risk trade sectors and locations around the UK to ensure they were complying with tax regulations.

HMRC is unable to estimate the total tax liabilities under investigation, but the 45 cases that have been processed so far have yielded £634,000, giving an average yield per case of about £14,000.

So far, the task force has been focusing on London, the North West of England and Scotland. 222 investigations have been started north of the border, 159 in the Capital and 150 in the North West. The Revenue is currently considering whether to start Civil Investigation of Fraud procedures or criminal prosecutions in 22 cases.

The Revenue intends to set up a further nine task forces in the financial year ending April 2012 and has said that more will follow.

The government is keen to stamp out tax evasion and in last year’s Spending Review it allocated additional funds to help HMRC tackle the problem. When the task force was launched, the director general of enforcement and compliance at the Revenue explained that it was taking a new approach to dealing with tax evaders quickly and efficiently.

He added that the government is giving out a clear message that tax evaders will be tracked down, and not only fined but possibly facing a criminal prosecution.

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Last week protesters, including several IT contractors, gathered outside the London headquarters of HMRC to demand that Dave Hartnett, the permanent secretary for tax, resign.

A message on the UK Uncut website said the action was taken because of public outrage at the role Hartnett played in letting mega-rich corporations off paying billions they owed in tax. Examples of these let-offs include the settlements agreed with Goldman Sachs and Vodafone, both of which were multi-billion pound disputes.

Police met protesters at the main entrance to HMRC’s HQ and minor scuffles ensued. Protesters demanding the sacking of Hartnett followed Vince Cable, the business secretary, as he walked past the building.

UK Uncut says that Hartnett is a dishonest representative of a crooked system that allows the richest 1% to routinely avoid paying their fair share of taxes.

Hartnett has built up a high profile in the last few years and his reputation as the Whitehall civil servant who is most wined and dined has been linked to secret deals that let wealthy organisations off paying billions in tax.

UK Uncut estimates that £25 billion in Treasury money has been lost to tax evasion and had this money been collected, there would have been no need for the current government austerity measures.

Meanwhile, new research claims that plans to charge banks VAT would not lead to a significant increase in revenue for the government.

The study was conducted by Ben Lockwood, a professor at the University of Warwick, in conjunction with PwC. It found that the only potential increase in revenue would come from charging VAT on consumers because both EU banks and their business customers would be able to reclaim any VAT that was levied on them.

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Contractor accountants who have been salting away their money in a Swiss HSBC bank account will shortly be receiving a letter from HMRC.

The Revenue is writing to individuals offering them the opportunity to disclose their tax liabilities. Accountants can make use of the Liechtenstein Disclosure Facility, but if they choose to ignore HMRC’s correspondence, they could risk further investigation and face penalties of up to 200%. The worst offenders could also be prosecuted.

HMRC received details about the 6,000 accounts from a former HSBC employee. So far investigations have already been launched into more than 500 individuals and businesses holding HSBC bank accounts. After cross referencing with self-assessment tax returns, HMRC identified 6,000 accounts that had not been declared.

Dave Hartnett, the permanent secretary for tax at HMRC, was quick to point out that this was not an amnesty. The Revenue is not offering special penalty rates for people who make a voluntary disclosure, but it is an opportunity for them to correct past mistakes.

Simon Airey, from DLA Piper, feels that HMRC is making an extraordinarily generous offer. The Revenue is under a lot of pressure to collect overdue tax and it does not have the resources to conduct 6,000 complex tax investigations.

McGrigors’ director, Phil Berwick, said this proves that the UK/Swiss deal is one element of HMRC’s bid to put an end to tax evasion. The government is sending out a clear message that the net is closing and HSBC account holders who thought they had a year to sort out their tax affairs may be in for a nasty shock.

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Image: leaning on Antony Gormley by Photography King

Contractor accountants may get inundated with calls from private tutors and coaches after HMRC announced its latest clampdown on tax evaders.

The Tax Catch up Plan comes hot on the heels of other recent clampdowns on plumbers, medical professions and people who should have registered to pay VAT. The TCP specifically targets individuals who have not declared the income they have received from giving private lessons.

Academic tutors, as well as personal fitness coaches and dance instructors, now have until the end of March next year to declare and pay any unpaid tax for the years leading up to the fifth of April 2010.

HMRC says that anyone who comes forward by the March deadline will be unlikely to receive a penalty of more than 20% of the tax owing. However, after the deadline has passed, the Revenue will investigate the tax affairs of people who have not made a voluntary disclosure and they could face much steeper penalties. The maximum fine for tax evasion is 100% of the tax owed, and the worst case scenario could see offenders also facing criminal prosecution.

In order to take advantage of the TCP disclosure facility, tutors and coaches must register their intent with the Revenue no later than January 6th 2012. They will then have until the 31st of March to tell HMRC how much they owe, and pay it along with any penalties and interest that may be due.

HMRC has issued the following registration phone number – 0845-601-8817, which is open from 08:00 – 19:30, Monday to Friday, for people wishing to register their intent to make a full disclosure under the plan.

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Image: bs-v-folie-1-gruppe-tutor by algogenius