The new tax crackdown that’s left freelancers with £250,000 bills
Thousands of freelancers have been threatened with huge tax bills in HM Revenue and Customs’ latest crackdown on the self-employed.
The tax authority has written to an estimated 2,000 freelancers, stating they owe tens of thousands of pounds in underpaid tax because their accountancy firms had allegedly broken tax rules.
HMRC claims Boox, a member of the Institute of Chartered Accountants in England and Wales, and Churchill Knight & Associates, breached managed service company (MSC) law.
This law was introduced in 2007 to stop company directors paying less tax by handing over control of the firm to a third-party, like an accountant. HMRC claims the two firms influenced how contractors ran their companies and therefore employment taxes should have been paid.
But experts argue that the “loose definition” of a managed services company has allowed HMRC to apply the rules too liberally and others have described the move as a “cynical tax grab”. Both companies have denied the allegations.
The letters were first sent in 2022 and lawyers estimate it could be 2028 before a final judgment is reached in court. Until then, thousands of freelancers remain in limbo.
If HMRC argues its case successfully in the tribunal, then the number of contractors affected could grow into the hundreds of thousands – making the scope of this crackdown potentially even larger than that of the controversial loan charge scandal.
‘I was trying to pay the right amount of tax’
One client of Boox, who was hit “out of the blue” with a bill for a quarter of a million pounds, said the whole ordeal had been “horrific”.
“It’s had a massive impact on my business. I’ve had anxiety. It’s been a constant black cloud over me. I’ve got family, kids, and I don’t know where I stand.”
The client, who runs his own consultancy, said he started using Boox because its app made staying on top of his company finances and tax affairs much easier. “I could raise my own invoices and it showed me exactly what I owed in tax and when it needed to be paid.”
He said: “The irony is, I was trying to pay the right amount of tax.”
Freelancers who own their own company pay corporation tax as well as tax on dividends, compared to those taxed through Pay As You Earn.
Qdos, a tax compliance firm, said the contractors it was helping were being chased for an average bill of £57,000 in employment taxes.
However, the tax bills HMRC sent to freelancers were even higher because the tax office had not taken into account the tax they had already paid.
On top of this, it had also based the calculations on company turnover, rather than the income the individuals received.
HMRC said it is working to obtain information on the income paid to clients as well as the tax they have already paid to ensure they do not overpay tax.
David Kirk, a chartered accountant with 300 clients caught up in the dispute, said: “These people have been given tax bills that have terrified them.
“They include cancer patients and pensioners who need to know how much they have to live on.”
Hundreds of thousands could face “devastating tax bills”
HMRC argues that Boox and Churchill Knight were breaching MSC legislation.
This little-known law was introduced 17 years ago and has been highly effective in stamping out so-called “composite companies” where a group of shareholders avoid employment taxes.
But the loose definition of a managed services company has allowed HMRC to apply the rules too liberally, experts have claimed.
In its investigation, HMRC had found Churchill Knight met three out of five features consistent with being an MSC, the Financial Times reported in 2022.
These were that it charged a yearly fee, “influences” how it received payments by issuing a yearly statement of how much individuals would receive from their company, and that it requires clients to use an online portal.
Another Boox client said he received a letter from HMRC in 2022 saying he owed £50,000 in tax.
“HMRC felt Boox was overstepping the market in how they worked with clients in that they were telling us what to do,” he said. “I thought, ‘this is complete nonsense. They don’t tell me how to run my business at all. They just do my accounts.’”
Like the others impacted, he is now waiting until a decision is reached once “test cases” reach the tribunal. “Until then, my wife and I can’t make any financial decisions. How can I if I might need to pay a ton of money?”
Seb Maley, chief executive of Qdos, said that if HMRC wins in court and applies the legislation more broadly, “hundreds of thousands of innocent contractors could be left with devastating tax bills”.
He continued: “HMRC is placing the blame on contractors who, in reality, have simply listened to the advice of third-parties – in many ways, it bears similarities to the loan charge.
“However, the motivation to work through what HMRC suspects to be a managed service company wasn’t tax-related. Contractors had simply chosen an accountant with a specialism in their business profile – but their tax position would be the same had they used any high street accountancy firm.
“Added to this, the sheer number of contractors this ambiguous and ill-considered legislation could impact may well be greater than the loan charge.”
Mr Kirk has put in counterclaims for the corporation tax paid by his clients, all of whom have individually appealed to HMRC.
“With three likely rounds of appeals the contractors may well be waiting until 2028 before a final judgement is reached,” he said, “and that is on the test cases. Even then, they will only stick where their facts are on all fours with everyone else’s.”
Mr Kirk said: “I’ve been a Chartered Accountant for 44 years and I can’t tell them apart from a compliant accountancy firm. How on earth is an outsider supposed to be able to do this?”
Mr Kirk added HMRC were “shooting themselves in the foot” by going after accountants for using an online portal when the tax office is itself trying to encourage more people to sort out their tax affairs online through its Making Tax Digital project.
‘A living nightmare’
In a statement published on Churchill Knight’s website in 2022, Tom Edwards, its director, said: “We believe that HMRC has entirely misinterpreted the MSC legislation, and we strongly deny being involved with our accountancy clients as a Managed Service Company Provider. Throughout this investigation, we’re offering around the clock support to our impacted clients and have built an online portal to help them throughout the appeals process.
“Everyone at Churchill Knight is shocked about this investigation, but I don’t feel like it’s an attack on us. It’s an attack on the industry and on contractors who operate their own limited company.
Boox is now no longer trading. A statement on its website reads: “Unfortunately the ongoing HMRC investigation has had a hugely negative impact on our business which has led to us no longer being able to sustain or operate our accountancy practice.”
The firm added that it continues to challenge HMRC.
Andy Chamberlain, policy director at IPSE, said “the investigations had been a living nightmare for those affected”.
“These rules were never designed to prevent freelancers from working with accountants, something which the Government was at pains to point out when it introduced them,” he added.
“Ministers must now consider if the MSC rules are being applied appropriately, or whether HMRC is twisting the rules in a cynical tax grab against a group of small business owners who will struggle to resource a years-long legal battle.”
If a company is found to be in breach of the legislation, then all of its clients will pay employment tax by default.
A spokesman for HMRC said: “We know there’s a real person behind every bill and we recognise dealing with large tax bills comes with significant pressure. Our message to anyone worried about a tax liability is to contact us as soon as possible to talk about options.
“The Managed Service Company rules exist to help ensure people who work like employees pay tax like employees.”
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