HMRC was today slammed for failing to distinguish between genuine tax avoidance and innocent mistakes when wielding "broad, disproportionate powers" like the retrospective loan charges devastating some tech freelancers.
In a damning report, the House of Lords Economic Affairs Committee said the taxman wasn't treating people fairly.
Much of its ire was focused on HMRC's use of the loan charge, which was introduced in 2017 and is used to smack taxpayers – often contractors – retrospectively. This meant people were hit hard without preparation or savings to pay up.
To make matters worse, some people who used these schemes were required to do so by their employers; others who felt they had been incorrectly caught in the net of tax rules, such as IR35, thought they might be a legitimate way of paying the right amount to the taxman.
Extended powers like this – which were given to the department as a way to ensure tax was recouped – "disproportionately affect unrepresented and lower income taxpayers", the peers said.
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The way HMRC approached the loan charge is "devastating the lives of middle and lower income individuals, from the private and public sector (including the National Health Service)", committee chairman Lord Forsyth of Drumlean said.
He added the committee had received "disturbing evidence" from people who had been affected by the charge, some of which is published at the end of the report.
A number of taxpayers report being told to use schemes by their employers. These include things like an Employee Benefits Trust – which is used by businesses to receive a tax deduction and pay funds were paid to employees as non-taxable loans. Another individual, an IT contractor, told the committee it was used as an alternative to the "confusing and poorly understood" IR35 legislation.
The problem is that the charge is retrospective; Lord Forsyth said it was used to claim tax "from years which should be closed to enquiry".
He emphasised the UK tax collector should tackle tax evasion and aggressive tax avoidance, but that it needed to strike a balance between clamping down and treating taxpayers fairly.
"Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer should expect."
The committee called on the government to widen the role of HMRC's Adjudicator or increase the tax service's obligations to act on that body's recommendations, and to commission an independent review of the taxman's work.
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Contractor lobbyists have seized on the criticisms of HMRC's approach to tax collection as an indictment of its rapid overhaul of rules on off-payroll working in 2017.
There, the revenue service's aim is to squeeze contractors for more cash by shifting the liability of determining contractors' IR35 status from the contractors to the organisations hiring them.
The reforms began in the public sector – reportedly causing a mass exodus of government IT contractors – and is being rolled out to the private sector in April 2020. That's despite complaints about a lack of evidence that the reforms are effective and difficulties assessing people's tax status – even when using HMRC's own CEST tool to check.
Dave Chaplin, CEO of ContractorCalculator, said that the kinds of schemes described in the report come about due to HMRC's "aggressive tax legislation" such as IR35 and its "ghastly sequel" of off-payroll reforms.
"As we approach April 2020, with the planned extension to roll out the IR35 reforms to the private sector, I'm already seeing new schemes being designed," he said.
"History is likely to repeat itself, the result being damage done to the flexible workforce, more taxpayers unwittingly becoming tax cheats, and a travesty 10 times worse than the loan charge surfacing in 10 years' time."
Seb Maley, chief exec of Qdos, agreed, saying that HMRC's "aggressive pursuit of contractors has had disastrous consequences" in the past.
"With further IR35 reform on the horizon, it's vital these recommendations are taken seriously and appropriate changes made to the way HMRC enforces tax compliance." ®