The Freelancer and Contractor Services Association (FCSA), an Umbrella Company trade association, has expressed outrage over HMRC’s handling of online tax returns for contracting professionals working via Personal Service Companies (PSCs).

The FCSA has learned that the Revenue’s software is incapable of calculating how PSC contractors’ dividend tax allowances interact with other tax allowances, a deficit that means that these freelancers will be unable to submit their tax returns online.

HMRC has declared that it has no plans to fix the problem, as “it only affects a very small percentage of taxpayers.”

That comment sits uneasily with HMRC’s position while consulting on changes to IR35 regulations, when it asserted that the number of PSCs operating in the UK is large, having grown by 65,000 between 2011-12 and 2012-13 to reach a total of 265,000. This, the Revenue claimed, was significant enough to justify diverting appreciable resources into crafting new legislation targeting PSCs.

Assuming that the Revenue’s figures are accurate, PSCs now number approximately 525,000. All will be affected by this software deficit, as will everyone who receives a dividend allowance and wishes to submit their tax return online.

The Revenue has advised those affected to submit a paper return, which will continue to be accepted without penalty until 31st January 2018 (the deadline for online returns) instead of the usual October deadline.

The FCSA’s CEO, Julia Kermode, observed that once again, the country’s smallest businesses are being hampered by a failure that the HMRC has no intention of correcting. The cost of the increased admin burden arising from this failure, she noted, will be borne by PSC contractors and their accountants, a situation that she described as “wholly unfair.”

Addressing the claim that only a small percentage of taxpayers will be affected, Ms Kermode pointed out to HMRC that its estimate is not accurate and that the number of people significantly impacted by the software malfunction is not small. The ONS has indicated, for example, that around 11.9 per cent of shares on the London Stock Exchange are held by individuals. Many received dividends last year and are planning to submit their self-assessment returns online.

She added: “It’s an absolute shambles, and one cannot help but speculate if the reason that HMRC is unable to resolve the issue is due to a shortage of IT contractors, which has come about since the IR35 changes were imposed earlier this month. Since then, we have learned that many contractors have been released from Government projects or simply chosen to leave in pursuit of private sector roles rather than be deemed to be unfairly caught by IR35. I fear we will see more fallout in time!”

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