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Freelance contractors facing new tax penalty

Contractors working on a freelance basis could be looking at another potential tax headache, after HMRC won its legal action against workers who used managed service companies (MSCs) to avoid NI and tax.

The workers in this particular case were employed as freelancers in the healthcare sector and the MSCs that they had used were set up by Costelloe Business Services, a company that has since been dissolved.

An MSC is a type of limited company set up by an outside party for freelance contractors and it enables them to send out bills through this company, with the party that set it up then collecting earnings and giving them to the contractors as dividends. This reduces the amount of NI and tax owed.

The legal case mounted by HMRC argued that this was a breach of the existing legislation on managed service companies and its victory leaves the five freelancers looking at NI and tax charges of close to £160,000.

Experts in tax law are stating that the result could raise alarm bells for contractors around the country who have entered into schemes of this kind. Some may be looking to get advice from specialist tax return accountants on what it could mean for them.

Seb Maley of Qdos told the Financial Times that if contractors who had entered into such schemes innocently were targeted by HMRC, it would be a further blow to freelance employees who are already struggling to cope with the recent tax changes such as the new loan charge.

Posted by Peter
May 13, 2019

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