Result = huge damage and less tax income
This is not just short sighted its seriously damaging. HMRC really do not get what they are doing. Most contractors with Limited companies actually pay significantly MORE tax than HMRC claim as HMRC fail to take into account Corporate tax and tax on dividends. Yes contractors pay less NI, but once you take into account standard rate tax is 20%, corporate tax is 19% which offsets and you pay tax on dividends AFTER corporate tax, the top rate of tax is actually 19% + 32.5% = 51.5% not 40%.
I can also see a lot of small Limited companies going to the wall, so HMRC will also suffer losses from all these companies not paying 19/20 tax year or in many cases 18/19 tax year corporate tax, not to mention the cost of managing all of these companies closing down.
I am now looking at full time positions. Given one offer, yes my take home will drop 37% - BUT the tax I pay will also drop 29%..... go figure.
Its not that HMRC are shooting themselves in the foot that amazes me, it's how fast they can re-load!