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HMRC criticised over year-long tax probe delay

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Contractors under investigation over alleged tax underpayments worth tens of thousands of pounds, have criticised HM Revenue & Customs for taking over a year to pursue the probe.

The dispute centres around a little-known tax law controlling how freelancers manage their finances and could impact dozens of accountants and hundreds of thousands of freelancers.

In March 2022, the tax authority sent letters to more than 1,000 freelancers, who had used specialist accountancy firms, informing them it believed they had breached managed service company (MSC) law. This law is designed to ensure contractors take responsibility for running their own limited companies.

Although the freelancers wrote to contest HMRC’s decision within weeks (in April 2022), advisers representing those affected said the tax office had yet to respond in depth to the contractors’ case.

Even when it does, the dispute could run on for much longer and may eventually end up at a tax tribunal.

“HMRC has a habit of demanding vast sums from individuals who have very often done nothing wrong, only to leave them in limbo for years,” said Seb Maley, chief executive of Qdos, an advisory firm.

Of the 100 or so people his firm is representing, the average tax bill HMRC claims the contractors owe is £57,000, rising to £69,000 in some instances. Interest, and in some cases late payment penalties, are accruing on the potential bills.

Another adviser to affected contractors accused HMRC of only sending “very generic and sometimes confusing communication”.

“Where they have appealed regarding specifics about their company, HMRC have chosen to, in the main, ignore the extensive reasoning and instead just place their liability on hold pending a tribunal decision,” the adviser said.

Maley said the “ambiguous” nature of the MSC legislation left the door open for HMRC to target hundreds of thousands of contractors and dozens of specialist accountants.

“The motivation for contractors to work this way wasn’t tax related,” he added. “These people simply engaged an accountant that specialised in their industry and this business structure.”

The managed service company rules are separate to the off-payroll rules, known as IR35. MSC law seeks to stop company directors benefiting from paying corporate taxes and dividend taxes, typically charged at lower rates, instead of employment taxes — if the company is controlled by another party, like an accountant or tax adviser.

When HMRC categorises a firm as an MSC provider it deems all its clients as users of an MSC and levies PAYE and national insurance on any income earned by the contractors’ businesses.

Two specialist accountancy firms, Boox and Churchill Knight & Associates, were last year accused of breaking the MSC rules — thereby plunging their clients into HMRC’s tax inquiry. Both firms strongly deny HMRC’s allegation.

Churchill Knight & Associates has been raising money to support a tribunal challenge against HMRC’s claims. Tom Edwards, its operations director, said: “The company wishes to support all clients and ex-clients who have been wrongfully accused as well as protect accountants over future attacks.”

Boox has since ceased trading. A message on its website stated the HMRC investigation had had “a hugely negative impact on our business which has led to us no longer being able to sustain or operate our accountancy practice”.

A software consultant caught up in the dispute told FT Money that there was no difference in the way Churchill Knight & Associates had provided accountancy services to three other accountants he uses.

“This case is very important to any UK business owner running a small or medium business,” he said. “It’s about hundreds of clients at one company, but that company has acted no different from others. My message to everyone is beware.”

HMRC said: “People who work like employees must pay tax like employees. The rules stop an intermediary company setting up a structure to avoid tax.

“We will act when these structures are used to ensure the right tax is paid. Any action follows considerable evidence gathering and expert advice.

“We have written to update affected companies, and we will respond to correspondence from those companies, or their advisers, on a case-by-case basis.”

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