Untrusted HMRC has its work cut out building bridges with understandably aggrieved contractors

Contractor UK has featured two articles recently. One is from the newly appointed head of HMRC’s Counter Avoidance teams, Jonathan Smith. The other is from the spokesperson for the Loan Charge Action Group, Steve Packham.

They present very different views as to where they see their respective paths going over the next year or so. This clearly characterises the gulf that exists between HMRC and taxpayers, writes Graham Webber, director of tax at WTT Consulting.

Setting our their stalls: What LCAG, HMRC, said in their ContractorUK exclusives

The message from HMRC in its article is that they are taking steps which, they consider, make it easier for taxpayers to avoid being sucked into avoidance schemes unwittingly. Some of those steps make sense, some seem impractical, and some will be almost impossible in the real world. Yet I have no doubt that we will see these steps being pointed out to judges in tribunals as a ‘reasonable’ benchmark for all taxpayers.

The response from LCAG was very much focused on the loan charge and the long list of perceived mis-steps and inconsistent application of that very controversial tax charge. Stripped of semantics around retrospective and retroactive, the loan charge does indeed remain a poorly thought-through charge, introduced in an underhand manner to fix a “problem” that HMRC created for themselves. Those impacted, contractors included, are understandably aggrieved.

Moving on

From reading Smith’s article, it's clear that HMRC wants to move on from historic enquiries to the prevention of avoidance.

From reading Packham’s article, it’s equally clear taxpayer groups subject to those historic tax charges want to obtain a degree of fairness in how they are treated. And that, the groups say, needs to happen before any ‘moving on’ can be done.

I agree. HMRC needs to acknowledge that errors have been made before progress and agreement -- or at least a compromise -- can be reached.

IR35, avoidance, and schemes (over 150 of them)

It is a fact that HMRC erred in failing to spot and deal with a problem that the IR35 legislation created, until that problem grew to billions of pounds.

Related, taxpayers will always be tempted by avoidance (which of course is not illegal) and in the early 2000s, none of HMRC’s preventative measures which are now being implemented were even a glint in a single civil servant’s eye.

That does not mean that some of the schemes were not reckless or provocative, however.

What we do have today in 2023, without question, is a lot of unresolved schemes -- we have over 150 on our books alone. Tens of thousands of taxpayers are languishing with old tax enquiries, amid a new HMRC broom looking to just cleanly sweep to the future while a very hard line on old enquiries remains.  

The way forward

What we need if this impasse is to lessen in severity is discussions which aim to arrive at a fair resolution.

Surely Mr Smith, it must be the case that HMRC does not want to see litigation in tribunals for the next decade. But that’s where we’re heading.

No doubt HMRC is eyeing the alleged huge amount of tax due (an amount that is ‘adjusted’ depending on who’s asking) and has potentially promised HM Treasury those funds. At the same time taxpayers are looking at that sum and see that it represents a sale of assets -- perhaps even their own home and deductions from income for the next decade. Financial Armageddon at an already a cost-of-living-crisis-time, when many affected individuals are looking to retire.

To Messrs Smith and Packham, I’d like to point out that a compromise does exist. We have already suggested how this might work, privately to HMRC and publicly, but we know that our proposals were rejected by counter avoidance directorate (back in 2016).

HMRC, look at lifting the LSS

What compromise will take, HMRC, is for the Litigation Settlement Strategy to be lifted for a defined period of time, to enable a consistent settlement policy.

Given the passing of time and the approach taken by HMRC to date, no doubt there will be a population of taxpayers that will want to continue litigation regardless of any reduced settlement. This should be expected, and will be supported through cases moving through tribunal, including our own, one of which was heard at the First-tier Tribunal last year and is scheduled to continue later this year.

Nevertheless, there is an equal amount of taxpayers that simply want to move on in a way that does not alter their life forever.

The untrusted taxman needs buy-in, before he can build-in

Once those taxpayers can move on and settle this historic mess, then preventative measures from HMRC can be properly engaged with and ‘built-in’ to the actions already being discussed by those who work in this sector every day. But without ‘buy-in’ from those recruitment agencies, umbrellas, and us tax advisers, all of HMRC’s proposals will be ineffective, unless they come up with draconian, punitive measures.

There will always be a limit to improving compliance in a space where HMRC has at best a poor reputation and, unfortunately, a pervading lack of trust.

Prevention better than cure

To reassure the Revenue though, most of those we assist with tax disputes and surely Mr Packham too, welcome prevention rather than cure. Our own work has a core of dealing with historic enquiries, but it’s increasingly also about looking to the future and keeping our clients compliant.

So, HMRC’s message to contractors has been received -- loud and clear, which is why more and more contractors are looking to ensure they can enjoy all their earnings now, and that means without having to save for a possible tax enquiry.

Finally, this long journey requires clean hands and open minds…

Both taxpayer and tax authority, therefore, need to come to the table with clean hands and open minds. To both parties I say this -- find a quick and easy way to resolve the past. Work together to ensure that those who promote avoidance can be penalised and those who chose to use avoidance, know the risks.

Only then can the long journey to rebuilding trust between contractor and HMRC begin.