Thousands of contractors and freelancers have become ensnared in a £5.5bn tax grab – aimed initially at wealthy tax dodgers – that allows HM Revenue & Customs to demand backdated taxes to be paid, in full, within a three-month deadline.
The allegedly underpaid tax can relate to periods of employment from many years ago.
HMRC was handed the powers last year to force wealthy investors accused of using “aggressive tax avoidance” schemes to pay their potential tax liabilities up front, instead of having to chase them through the courts.
Previously, HMRC was forced to pursue its missing billions in costly court battles, prompting the Government to approve the legislation in 2014.
Millionaire businesspeople and Premier League footballers are now facing tax demands of up to £10m after pouring money into questionable, tax-driven investment schemes.
Most schemes depended upon the tax reliefs available for film projects and other start-ups. “Tax avoiders are running out of options,” said Jennie Granger, HMRC’s director of enforcement. “People now have to pay upfront and dispute later.”
But evidence suggests that HMRC’s powers to demand “accelerated payments” are being used to target more moderately well-off individuals – who are only now being told to pay back-taxes from jobs they held years ago.
HMRC has, for years, retained the right to go after these taxpayers for tax allegedly underpaid.
Among them is freelance IT technician Mr Adams (not his real name), who since April has received three demands totalling £27,900 from a job he held seven years ago.
If it’s later found that he was innocent of using an “aggressive avoidance” scheme, he will get a refund. In the meantime he has to find the money within months.
“The latest deadline I’ve been given is the end of September,” said Mr Adams, who explained that the amount was around a third of his yearly salary. “If I don’t get the money, I’ll go bankrupt.”
Between 2008 and 2010, Mr Adams freelanced at various banks in London.
I know I’ll get the money back if I can prove I was innocent – but what position will I be in then?
– An IT worker facing a £30,000 tax demand
During this time he received a letter from HMRC telling him it was looking into his tax affairs, and saying it would “let him know” if anything was untoward.
Five years of silence followed. Mr Adams, 35, considered the matter closed. That was before April, when HMRC’s “accelerated payments team” gave him three months to pay the £27,900.
“I know I’ll get the money back if I can prove I was innocent – but what position will I be in then?” he said. “My wife owns a beauty salon and I have two daughters. We are not in a position to hand over this money.”
HMRC’s brief notification in 2010 was enough to open an “inquiry” meaning it can sidestep rules that impose a time limit on demanding back-taxes.
A current rule, known as “schedule 39”, means HMRC can only look into income taxes from four years ago, unless it can prove you were “careless”, in which case the time-limit is six years. HMRC has far longer, 20 years, if it can prove you are a “deliberate” avoider.
An HMRC spokesman said: “Anyone who can’t pay should talk to us as soon as possible and we will do all we can to help, such as a suitable payment arrangement.”
Mr Adams has now attempted to set up a payment plan with HMRC, but has been told the money owed will be passed to a debt collector if he doesn’t pay up within nine months.
Telegraph Money has heard from countless freelancers, mostly working in computing, banking and the oil and gas sectors in the late 2000s, who are only now being informed by HMRC that their tax affairs were classed as “aggressive avoidance”.
They are the fresh focus of HMRC’s new power to calculate the tax it deems is owed and demand it is paid upfront . Refunds will be given only later if it finds its sums were wrong. Such demands are being sent to 64,000 people.
Most of the freelancers affected earn salaries of between £60,000 to £80,000 but are being told to pay sums that are equivalent to their yearly pay – but within a 90 day deadline.
But once the money is paid, taxpayers can wait several months for a decision and in the meantime HMRC can add interest, penalties or other taxes on top.
“HMRC insisted these powers wouldn’t be used disproportionately,” said Dominic Arnold of accountants Moore Stephens, who has several clients dealing with “accelerated payments” on his books.
“The message was very clear that they would be issued to people who can afford it, which masks the reality that thousands of people are being caught who haven’t got the funds to pay an accountant – let alone challenge the sums in court,” he said.
HMRC has received £1bn so far from taxpayers who have received letters like those sent to Mr Adams, although much of this money is expected to be refunded.
The calculations that HMRC come up with can be overinflated by as much as 25pc, Mr Arnold said.
Another major accountancy firm, BDO, said the demands it had seen were wrong by “tens of thousands of pounds” in some cases.
So far, at least £28 million has been refunded to taxpayers who made accelerated payments to HMRC but were later told that the amount owed was either miscalculated or that they didn’t owe any tax at all.
In an impact assessment published last year, HMRC defended its new power by saying that “affluent” people on six-figure salaries would be sent accelerated payment demands.
“Individuals affected have a mean gross income of £262,000 compared to £29,000 for the wider income-tax-paying population,” it said, adding that 85pc will have multiple sources of income.
But the middle-class workers now in HMRC’s sights were completely unaware that HMRC would later deem their tax affairs in the same category as the millionaire investors.
“None of the freelancers I’ve ever seen have a fighting fund like the investors do. They believed that what they were doing was allowed, and are only now being told otherwise,” Mr Arnold said.
HMRC’s campaign concerns the thousands of former freelancers who used now-controversial “employment benefit trust” schemes, which were sold and operated by large companies.
Approximately 22,300 freelancers were marketed these schemes as an alternative to setting up a limited company in their own name. The majority were contracted workers in IT and financial services, who would move from workplace to workplace every few months.
It provided an alternative to taking an income through a limited company, sometimes known as “personal service companies”.
Many of the arrangements are legitimate ways of avoiding tax, provided they meet the taxman’s definition of a genuine contractor and not an employee.
But many freelancers fear falling foul of a tax avoidance rule, called IR35, that says people cannot be “disguised employees” – or evade tax by paying themselves through companies.
These schemes promised workers could sidestep the IR35 legislation and avoid the administrative burden of owning a company.
Instead workers entered into even riskier tax arrangements.
In the schemes, employers paid a salary to an offshore intermediary, which takes a commission, before paying this money to the worker in the form of a tax-free loan. They paid as little as 5pc in tax, with the rest pocketed by the company.
HMRC now says it regards contractor loan arrangements as being “particularly aggressive”.
And it is easy to catch the freelancers who used these companies because they disclosed it on their tax returns, with a “Disclosure of tax avoidance scheme” or “Dotas” number.
HMRC has now issued a list of 1,200 Dotas numbers – corresponding to various avoidance schemes, many of which are now closed – whose users will be issued with accelerated payment notices.
“This makes the freelancers low hanging fruit, in HMRC’s eyes,” said Lucy Brennan a tax adviser at Saffery Champness. “If they can grab thousands of workers with just one Dotas number, it will be worth just as much as forcing one millionaire investor to pay.”
But why did the Revenue wait years before pursuing these people?
“We’re in a different era now,” said Ms Brennan. “Before 2008, these loan arrangements were popular but HMRC didn’t have the resources to crack down on them.
“Then the Recession came and it all changed – the Treasury needed more money and this new power provided the opportunity to pursue years of backdated taxes.”
Ms Brennan admitted these workers were “naive” and should have sought proper advice. “But the companies marketing these schemes weren’t just a few cowboys – they were big organisations,” Ms Brennan said.
Another freelancer we spoke to, Mr Marion, said he was “completely unaware” that the loan scheme was risky when he joined after it was recommended by colleagues.
He moved from France in 2006 to begin contract work in London.
“I was not familiar with British law at the time but someone told me about another solution, a so-called contractor scheme,” said Mr Marion, who signed up in 2006. “It offered protection against the feared IR35 legislation,” he said.
At the time, he had also received a notice of inquiry from HMRC, saying: “We do check a number of returns … [we] will let you know if anything is not in order.”
The contract company he used said that this was “routine” and that he should not worry.
Nine years later, he is being pursued for a six-figure owed on tax returns between 2006 and 2010.
“I’m not a famous footballer or a rock star,” he said. “I do not have access to this kind of money. In 10 years’ time a lot of things happen.”
Even if HMRC doesn’t investigate the case for years, as long as they have sent a notice of inquiry they can legally send an APN to someone they believe has dodged tax. But if you can prove there was no active inquiry, HMRC cannot pursue taxes from longer than four years ago.