Taxman hitting FD with fines as crackdown on “freelance” workers bites
In the year to April, around 125 senior finance executives were fined £5,000 for “failure to account properly for their businesses’ income and expenditure for tax purposes”, according to new figures compiled by law firm Pinsent Mason.
The penalties have been viewed as evidence that HMRC is increasingly targeting finance directors of companies for failing to prevent their staff from avoiding tax.
Ian Hyde, a tax dispute partner at Pinsent Mason, said the increasing incidents of sanctioned finance directors is likely to be part of HMRC clampdown on employment tax compliance, and what it calls disguised employment.
Mr Hyde says many of the fines would be for errors in payroll about the tax paid on expenses, payment of national insurance and income tax, and the employment status of workers.
Speaking in The Times newspaper he said: “Finance directors are personally liable for these fines, but it is not about the money. These are well-paid executives, it is about their reputation. Having this on your record is not great.”
Mr Hyde says employment tax compliance is where full-time employees claim to be freelance to reduce their tax and national insurance liabilities.
Mr Hyde continued: “HMRC is treating claims of self-employed status in some industries with more scepticism than it may have done in the past. Finance directors can be held responsible if the tax authority determines that they did not have adequate arrangements in place to prevent contractors from being treated as full-time employees,” Mr Hyde says.
“Chief finance officers of businesses that use a large number of contractors, especially through personal service companies, could see more fines in the coming years.”
Almost 100,000 contractors paid through disguised remuneration have been asked to make themselves known to the tax office to avoid a loan charge being added to the unpaid tax they are now being asked to pay as employment status becomes an increasingly particular focus for the tax office.
Many of these firms used “umbrella” payroll companies to manage their financial affairs.
The schemes took payments on workers’ behalf and paid them back in “loans” that circumvented tax legislation. The schemes attracted workers by promising that they could take home 80 to 90 per cent of their income without being taxed.
Last month the chancellor said that he would stop freelancers working as off-payroll contractors for medium and large companies in the private sector from 2020 (the rules were changed in the public sector last year).
This rule change is known as IR35 and relates to tax legislation designed to stop contractors supplying their services through personal services companies if they would be considered an employee without the intermediary. The government estimates that one in three self-employed workers who operate in this way should be paying more tax and national insurance.
Mr Hyde added: “The tax office started by doing straight employment checks, but is now cracking down on the gig economy and the use of personal services companies. The IR35 issue has focused on the contractors, but from April 2020 it will switch to being an employers’ problem and I think we will see a lot more fines for finance directors. It is going to be a big problem for a lot of companies.”