Welcome to the HMRC State, where the self-employed are second-class citizens

Posted on May 22nd, 2014 | Tax

As the UK’s self-employed become a political force in our own right, our swelling numbers are attracting more and more attention from HMRC’s tax inspectors. Are we being seen as easy pickings by the taxman; a hassle-free way for them to hit targets without going after large corporates?

The primary reason for HMRC’s newfound aggression against tax evaders large and small is the increasingly lavish budgets provided by Chancellor George Osborne to help tackle the Tax Gap – the difference between the amount of tax revenue HMRC should collect and the amount it actually receives. The taxman has been given around £1 billion since the Coalition Government came to power to tackle aggressive tax avoiders and evaders.

HMRC’s toolkit now includes a £45 million supercomputer called Connect which correlates data from several agencies, NSA-style, to piece together activity that may be an indicator of avoidance. Or, to put it in banal marketing speak:

“Connect is HMRC’s strategic risking tool that cross-matches one billion internal and third party data items to uncover hidden relationships across organisations, customers and their associated data links, such as bank interest, lifestyle indicators and stated tax liability.

“It captures information from 30 different data sources, and transforms the data into a standard format for Connect analytical and ‘spider diagram’ visualisation tools. HMRC statisticians produce target profiles and risk and intelligence investigators generate campaigns and cases for investigation.”

Tax inspectors are becoming more and more like law enforcement agents. Early in 2014 HMRC was given approval to break the speed limit and run red lights in pursuit of offenders, and at the 2014 Budget gained powers to collect potentially owed tax before trial (don’t worry – they’ll pay it back if they lose!), and dip into taxpayers’ bank accounts without their knowledge to recoup owed tax.

HMRC’s storied history of high-profile blunders has meant these new powers have been met with legitimate concern. Just this month it was revealed that half of VAT penalties issued by HMRC in 2013 were overturned on appeal due to issuing errors with HMRC’s software.

More money, more inspectors, higher targets

Although HMRC as a whole has been forced to downsize its headcount (from a high of 97,073 in April 2005 to 64,476 in its latest Annual Report), the Compliance and Enforcement department is set to swell from 26,000 to 28,000 next year.

They are enjoying some success, too – compliance revenues totalled £18.6 billion in 2011/12, and rose to £20.7 billion in 2012/13. Let’s take a closer look at that haul, though.

Although compliance revenue increased a healthy £2.1 billion between 2011/12 and 2012/13, the number of investigations undertaken by HMRC to achieve that increase was colossal. According to figures reported by the Telegraph around 119,000 tax investigations were launched by HMRC in 2011/12; the following year that number doubled to 237,215.

This explosion in enforcement activity means that the average yield per investigation was £156,303 in 2011/12, but in 2012/13 collapsed to just £87,263.


Put another way, HMRC made just £17,750 from every extra investigation it launched last year.

And the really worrying part? The number of self-employed professionals targeted by investigations jumped by a factor of four. HMRC is on the warpath – and they’re focusing on freelancers and contractors.

HMRC aren’t just getting more trigger-happy with investigations; they’re getting better at securing prosecutions. The number of convictions for tax fraud, avoidance and other financial malfeasance jumped sevenfold over the last three years. HMRC are also spending twice as much on private debt collection firms as they were two years ago.

Conservative MP and member of the Treasury Select Committee Brooks Newmark told the Telegraph:

“[People in] middle England are easy targets. The year-end comes, they’ve filled in their forms and sometimes there are some errors there that HMRC may in previous years have left or not necessarily picked up, but they are now nit-picking.

“It doesn’t take away from the fact that this money is genuinely owed. But it’s the approach with which HMRC goes about it. When HMRC writes you a letter it causes a huge amount of stress.”

Accountancy firm UHY Hacker Young has said this action amounts to HMRC picking soft targets. The self-employed seldom have the finances or confidence to properly defend themselves, and so will pay up as soon as HMRC threatens action.

The prospect of more inspectors with new powers, big budgets and targets to meet has many industry experts worried – especially in tax cases involving the much-criticised IR35 rules. Andy Vessey, Client Services Manager at QDos, who provide investigation insurance for freelancers and contractors, told us:

“In May 2012 HMRC guaranteed they would close enquiries into contractors’ tax affairs quickly if satisfactory evidence was provided.

“For the first year or so they stuck to their word, but now we’re seeing them starting to dig their heels in. Previously we’d see IR35 investigations going on for four or five years – the new administration in 2012 was supposed to fix that, but now we’re worried we’re going back to the bad old days.”

The impact of such an investigation on a freelancer can be huge. Meetings with HMRC, sorting backlogs of old contracts and paperwork, and the threat of a First Tier Tax Tribunal can all prove stressful for a one-person business. The financial implications of an investigation can very realistically destroy businesses too – an investigation into a multi-year contract can involve tens of thousands of pounds. If the contractor is taken to Tribunal without the necessary insurance they face the prospect of paying around £130 per hour for representation.

“Essentially, it looks like HMRC aren’t keeping their promises any more.” adds Vessey.

The impact of tens of thousands of well-funded, accident-prone, target-driven HMRC compliance officers is already being felt. The “soft targets” of freelancers, self-employed healthcare workers, consultants, IT contractors and others have become the focus of HMRC’s attention.

And every indicator shows the situation is only going to get worse.

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Written by Jon Norris

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