Top earners face massive HMRC tax bill after tax authority changes rules to target the elite

Some of Britain's top earners, including senior lawyers, accountants, architects and their employers, are coming under scrutiny from the tax authorities. HMRC fears that people in these six-figure salary sectors are manipulating the system to reduce their tax and National Insurance contributions.

This strategy involves designating some of these top earners as self-employed or partners, which allows them to reduce the amount of tax and National Insurance contributions they pay on their income. Their employers also benefit, as they pay less National Insurance contributions. HMRC has adjusted its interpretation of the rules to combat tax avoidance and ensure that top earners and companies cannot exploit this obvious loophole in the law. The legislation concerns whether senior partners of limited liability partnerships (LLPs) should be considered employees or self-employed for tax purposes.

The overall impact of this new approach could see employees facing large back taxes, while their employers could be forced to pay back hundreds of thousands of pounds in national insurance contributions. For a partner earning over £100,000 who has not paid national insurance contributions for five years, the liability would be around £5,000. The move is the latest attempt by the tax authority to crack down on “disguised employment”, which has led to TV and radio presenters being pursued all the way to court over income tax and national insurance contributions.

Labour has made tackling tax avoidance a key election pledge. The party has promised to raise a further £4.7 billion by tackling tax errors and evasion. Unlike ordinary employees, people who are considered partners in a business are entitled to be paid through a share of its profits, which is taxed differently to a salary. In addition, partners are often considered self-employed for tax purposes, meaning they pay lower national insurance contributions.

Guy Sterling of the accounting firm Moore Kingston Smith told the Telegraph: “Depending on the number of people affected and their remuneration, the amount at stake for the firm could be very significant.”

In 2014, HMRC introduced rules to prevent junior members of an LLP from being wrongly taxed as self-employed and receiving employment income 'disguised' as profit shares. Mr Sterling explained: “Before 2014, all members of LLPs were considered self-employed for tax purposes. There were situations where everyone, even cleaners, were members of the LLP and therefore paid lower national insurance contributions.”

HMRC currently operates under the targeted anti-avoidance rule (TAAR), which allows it to reclaim payroll tax where an arrangement has been made specifically to avoid national insurance. It has the power to go back four to six years and collect any underpaid tax. Mr Spencer commented: “I haven't seen many signs at the moment of HMRC launching many formal investigations, but the policy change is certainly a precursor to that. I suspect there could be a rise in investigations over the next six to 12 months as many businesses may not have noticed the policy change.”

A HMRC spokesperson said: “We updated our guidance in February to clarify the circumstances in which certain avoidance rules apply to help customers pay their taxes correctly.”