Does a tax avoidance clampdown pledge by four political parties spell trouble for contractors?

“With Labour, things will change. We will take on the tax dodgers”. That’s what shadow chancellor, Rachel Reeves, said back in April and it’s a pledge that has been repeated and regurgitated in all of the parties’ manifestos and during countless interviews across this election campaign.

But who are ‘the tax dodgers’? How will the new government go about collecting more of the tax it is, or believes it is, owed? Should legitimate, tax paying businesses be worried? I’ll try to tackle these interesting and potentially unsettling questions, here exclusively for ContractorUK, writes Andy Chamberlain, director of policy at IPSE (The Association of Independent Professionals and the Self-Employed).

2024 manifesto tax pledges are apparently fully-funded, but at what cost?

All of the parties have been challenged on how they will fund the various promises they’ve made ahead of the election. Invariably, at least part of their answer involves tackling tax avoidance and evasion.

The Conservatives claim they will raise £6billion a year; Labour - £5bn, and the Liberal Democrats - £7bn. Even Reform, who’s manifesto includes several tax cutting measures, says it would “Collect billions of pounds in Unpaid Tax,” though they resist putting an exact figure against the pledge.

The tax gap will not be straightforward to close

Arguably these are modest targets. HMRC estimates the tax gap – the difference between the amount of tax owed and the amount actually collected – to be just shy of £40bn or around 4.8% of total tax liabilities.

Perhaps then, collecting five or six extra billion will be fairly straightforward – it’s only a fraction of the amount that currently evades the taxman. Except, of course, it’s not straightforward at all. If it was, it would already be being done. So how will it be done?

Of the four parties mentioned above only Labour provides any indication at all about how it will close the tax gap. Their manifesto talks about modernising HMRC, changing the law to tackle tax avoidance and strengthening HMRC’s powers.

“Modernising HMRC” sounds fair enough, but it’s so vague it’s more or less meaningless. Also “Changing the law to tackle tax avoidance” is a strange one. There are already anti-avoidance laws in place so what could this ‘change’ to the law be referring to? Perhaps the answer lies in the next bit: “Strengthening HMRC powers”.

Additional HMRC powers should concern taxpayers – particularly small business

HMRC’s powers have already significantly increased in the last few years. And rightly so. The world is getting more complicated, not less, and HMRC will naturally need to be granted more powers to deal with ever more sophisticated schemes and scams that seek to undermine the tax base.

But at the same time, taxpayers must also be protected from unwarranted harassment from the department.

The concern is that the individual might be (even more) bullied into submission by an all-powerful HMRC, even when they’ve done nothing wrong.

Tax gap figures don’t bode well for small companies, even the compliant vast majority

HMRC estimates that 60% of the tax gap is down to small businesses. Big businesses account for just 11%. Medium sized businesses, wealthy people and criminals make up the remainder. With figures like that it’s not hard to see where the focus will be, and it won’t come as a surprise to those who work for themselves.

If you are in-business, you are quite probably already fearful of an HMRC investigation. You may even be in the midst of one right now, or perhaps you’ve managed to survive one. But what you (probably) don’t like the sound of, is more resource, more powers, and more political support for increased HMRC activity. Yet that is what all of the parties are effectively proposing, and there is certainly a danger that those who work for themselves will feel the brunt of it.

When you combine Rachel Reeves’s comments about “tax dodgers” and HMRC’s data about the tax gap, it’s not hard to come to the conclusion that the next government will view our smallest businesses with suspicion. This isn’t new -- many feel the current government views them with suspicion -- but it’s not exactly reassuring either. It feels as if the parties are seeking a new mandate to go even harder at those they perceive to be avoiding tax.

IPSE’s view is that everyone should pay the correct amount of tax and HMRC is completely entitled to go after those that don’t. But the rules must be clear and easy to comply with, which currently, they are not (IR35 being one shining example).

The impact of HMRC’s investigations

HMRC must also act responsibly and give due consideration to the impact of their investigations on individuals.

There are currently around 1,500 contractors living under the cloud of an Managed Service Company investigation by HMRC that is over two years old, and shows no sign of being resolved. It is not at all clear that any of them have done anything wrong and it is yet to be proved that any tax is owed. This is unacceptable. If the new powers and extra resource awarded to HMRC result in more investigations like that, it will be a disaster for thousands of compliant businesses.

Campaigning on behalf of the sector

IPSE’s manifesto for the 2024 election calls for greater ministerial oversight of HMRC. In other words, we would like to see HMRC run like every other governmental department. Not only would proper ministerial oversight empower taxpayers to hold HMRC to account – it would improve trust between them and the department and enable HMRC to fulfil its remit with greater confidence.

‘Going after the tax dodgers’ is a good sound bite. Anyone who pays their taxes will support it, in principle, but we must have accountability too. Without it, there is a danger that our smallest businesses will pay a very high price, simply because they work for themselves.