Regulation

Freelancers in tax avoidance schemes hit with bill for £1bn


By added on 12/07/2018

(The Times) -- Freelance workers including IT professionals and NHS locums have been ordered to hand over at least £1 billion in unpaid tax after their true earnings were disguised for years in avoidance schemes, The Times can reveal.

A total of 20,919 contractors have told HM Revenue & Customs (HMRC) that they allowed their financial affairs to be managed by offshore-based umbrella schemes, which collected their wages on their behalf and then paid them in “non-repayable loans” that hid their national insurance and income tax liabilities.

The freelancers who have so far admitted taking part in the schemes — which started emerging from 1999 but still exist today — are believed to owe the taxman an average of £50,000 each in underpaid tax, meaning they will have to collectively repay about £1 billion. HMRC insists they will be forced to settle their bill in full, although they will be able to arrange to pay it back in instalments over several years.

The taxman expects another 30,000 contractors to come forward before September 30, which is the deadline to avoid a hefty additional charge on top of the amount people owe. It will take effect next April. The taxman says it has already settled bills with another 5,000 freelancers, worth £500 million.

The freelancers bitterly contest the clampdown, claiming they were assured that the schemes were legitimate when they signed up and reassured by promoters that they were “approved by barristers”. However, they admit they were foolish to be attracted by promises that they would be paid 85 to 95 per cent of their wages tax-free.

Many schemes are based in offshore jurisdictions. They often operate through multiple names and addresses so the promoters are rarely caught.

Sixty-five per cent of affected workers are in the business services sector, which includes management consultants and IT consultants, 10 per cent are in construction, and 2 to 3 per cent work in medicine, mostly as locum doctors. Two thirds were enrolled in schemes for two years or more, and were earning at least double the national average wage, HMRC says. “They are saying they didn’t understand what they were doing, but I’m not sure a squaddie or a bricklayer or a secretary who is paying the tax they actually owe will have much sympathy,” a source added.

Iain Campbell, secretary-general of the Independent Health Professionals Association, which represents locum doctors and nurses, said: “Our advice has always been simple: avoid loan schemes at all cost. They are a ticking time bomb set to go off in April 2019.”

Case Study

Richard Horsley was enrolled in a scheme called Horizon from 2003 to April 2016 but says he only realised it fell foul of rules in 2015 when HMRC sent him a letter telling him that he had been participating in a tax avoidance scheme.

The IT contractor has been told by financial experts that he has a liability of up to £500,000. He set up the Loan Charge Action Group to help those affected. The group has been backed by 72 MPs.

Mr Horsley, 55, has registered with HMRC to reach a settlement and avoid the additional loan charge, but has yet to hear back. “Last year I was admitted to hospital with a suspected heart attack. This turned out to be stress-related anxiety, which I put down to the pressure of living with this issue every day,” he says. “I’m in a constant state of distress. The loan charge will bankrupt me and I will be unable to work in finance again.”