Contractors could face more investigations

The Government's consultation on small business red tape, announced in the Budget, could result in more tax investigations into contractors warns contractor specialists, giant group plc.

The consultation document "Working towards a new relationship: a consultation on priorities for reducing the administrative burden of the tax system on small business " suggests that those small businesses categorised as 'high risk' will be investigated more as the government tries to reduce the overall number of investigations by more efficient targeting.

Matthew Brown, Managing Director, giant group, said: "With IR35 and then Section 660 it's probably fair to say the Revenue classifies contractors as 'high risk'. Contractors will be very concerned if the consultation document is suggesting that they may face more investigations in the future, not less."

Matthew Brown believes this will make it even more important for contractors to ensure they have adequate IR35 insurance cover, as the costs of even an unsuccessful Revenue investigation can be highly significant.

According to giant, the consultation document claims that by adopting more sophisticated risk profiling techniques the overall number of tax investigations into small businesses is likely to fall.

The consultation also refuses to rule out random tax investigations says giant, even though the cost of compliance in relation to tax investigations can be a significant proportion of income for contractors.

Matthew Brown said: "When tax investigations are conducted entirely on a whim, the cost to taxpayers is completely unnecessary. If the tax authorities intend to continue with random investigations perhaps they should meet some of the costs."

Giant will be making a submission to the consultation before the closing deadline of June 30 2005. Its submission will raise the issue of the increasing frequency of tax investigations suffered by the freelance community and the substantial costs borne by freelancers in dealing with these investigations.