HMRC Targets Freelance Contracts

HMRC Targets Freelance Contracts.

Reports are circulating that HMRC is looking to crack down on the use of freelance contracts. This is yet another attack on both larger employers who buy in expertise and smaller, one-man band, limited companies.

By bringing in contractors, HMRC is targeting “disguised employment" for tax avoidance, whereby large companies do not employ the individual and therefore face employers national insurance costs, sickness costs, holiday pay and pension contributions. In addition, the contract via their own limited company avoids the same by paying smaller salaries, with lower national insurance contributions as well as then declaring dividends which up to the 40% tax bracket currently have no liability to tax as a tax credit is given because the limited company will have paid corporation tax.

It is understood that HMRC, via government legislation, will be given the power to force employers using contractors to fully police the contractors tax affairs. In short, the contract will become a virtual employee.

This clearly will increase the costs in bringing in contractors and is obviously designed to increase tax revenue as well as employment figures. Many contractors tend to land six-month and twelve-month contracts with extensions and this means they are employees in all but name. This, we believe is what HMRC will target.

Already, we have seen changes to dividend taxation meaning that many smaller limited company owner managers will face higher tax bills from next year as flat rate dividend taxation will be introduced in tiers starting at 7.5% in the basic rate band (previously zero), 32.5% in the higher rate bracket and 38.1% in the additional rate tax bracket, without the deduction of the 10% tax credit that is available today (meaning a higher rate taxpayer currently pays 22.5% after deduction of the 10% tax credit).

It is estimated that by targeting contractors, HMRC will raise an additional £0.5 billion in national insurance and potentially £3 billion plus in additional taxes on dividends from all equity holders/shareholders where their dividend income exceeds the new £5000 per annum tax-free dividend allowance.

This is killing business Britain. As ever, HMRC target growth areas and tax them. Make no mistake, this is a huge change for the small business start-up market and we believe in the short term it is designed to raise revenue by stealth yet to still encourage multinational companies to settle in the United Kingdom given the reduced corporation tax rate over the next few years, dropping to 19% on 1 April 2017 and 18% on 1 April 2020.