Revenue's self assessment now even more taxing with new five year headache for freelance workers

A recent Court of Appeal ruling has set a worrying precedent for freelancers, contractors and small businesses after the Inland Revenue declared it would now investigate tax returns with an extended window of 5 years.

Under the normal regime, investigations into self assessment tax returns need to be conducted by the IR within the first 12 months from last filing on the 31 January.

The decision stated in Langham v Veltema has been challenged by leading accountants, PKF, and is billed by the firm as a case of great public importance because of the sweeping legislation set to impact the country's taxpayers.

The stated amend in the case means that taxpayers and business can now be pulled up on improper filing as much as five years after their return - suggesting people won't actually know if they have paid the correct tax amount until the Revenue intervenes or five years expires.

PKF explained that the Langham V Veltema case spells a tax tightening that has rallied accountants and business advisors to support forthcoming efforts to get the five-year window reversed.

Tony Moorby, Director of Taxation at PKF, told Contractor UK: "This is a problem that applies to employed and self-employed people- anyone who has to fill in a self assessment return, not just contractors. This new ruling from the Court of Appeal should be a particular concern for everyone."

Investigations into assessment can cost business dearly with timely and closed procedures that amounted to 15,000 separate enquiries into improper filing within the first two years of self-assessment.

Simon Dolan, managing partner at SJD Accountancy, said: "This case has extremely wide ramifications and could affect almost all contractors and consultancies, as well as almost everyone who completes a Tax Return. With so much new legislation affecting contractors in particular, namely IR35, IR59I and S660, we wonder whether the Revenue need to force an extension to the previous one year window simply to keep pace with all the new laws."

Mr Moorby admitted the Inland Revenue often collects billions of pounds each year in 'avoided' tax- often legitimately due - but said that the new tax time revealed a more shady motivation from authorities.

"The motivation behind the case is about testing an area of law which is comparatively new, so the Revenue can see what the court thinks. They appear to be exploiting a loophole by extending deadlines by using all areas of the present system to claw back taxes owed."

He said : "The government knows its political suicide to raise tax rates so its collector uses the system already in place to collect on taxes with the same zeal they show with tax avoidance."

Furthermore he explained that the burden of self assessment was initially sold to the tax payer with a one year period of "certainty" and now that closure appears to be replaced with a five year umbrella within which the IR can investigate.

"The only way the 12 month window previously 'cast in stone' can be reenacted is for anything taxpayers return as assessment to have big white flags accompanying their form, saying 'please look at this now'. A reasonable and competent tax inspector would have taken action earlier."

The High Court has backed industry pleas to reverse the five year deadline and now the decision is to be decided upon in the House of Lords.

If the Court of Appeal's ruling is deemed accurate then taxpayers must not only complete their returns but also tell the Inland Revenue when they should raise an enquiry.

SJD Accountancy, which specialises in running services for contractors, told Freelance UK: "This new year five year opportunity for the Revenue to snoop into your affairs also affords them greater scope for maximising past tax, interest and penalties."

 

17th June 2004

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