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Would HMRC fine itself if its contractors got caught up in an umbrella tax avoidance scheme?

The HMRC and Treasury are cracking down on tax avoidance schemes but what happens when their contractors get caught in one?
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Following news that HMRC-hired contractors over the past year were predominately hired inside IR35 with many becoming umbrella company workers, Dave Chaplin, CEO of IR35 compliance firm IR35 Shield responds to questions about just how far HMRC will uphold accountability if it got caught in the crossfire of an umbrella tax avoidance scheme or scandal.

Can HMRC fine itself?

Based on the government’s call for more accountability to crack down on unsavoury practices in the contractor industry within the off-payroll supply chain (i.e. recruitment firms and umbrella companies exchanging kickbacks; skimming and tax avoidance), The Freelance Informer asked Chaplin if HMRC would have to fine itself if its contractors were caught up in an umbrella company scandal.

“If purported debt-transfer provisions applied to both agencies and hirers, then the debt could pass back to HMRC,” said Chaplin. “But, debt transfer rules are unlikely to be unconditional, and it seems unlikely an HMRC inspector would issue a direction against his own firm,” he said.

Inside IR35 HMRC contractors

We also asked Chaplin his thoughts about why HMRC has reportedly offered contractors predominately inside IR35 roles.

“HMRC should not have offered roles “Inside IR35,” ” said Chaplin, “because determinations must use a multi-factorial approach and it would be myopic to ignore relevant factors that are only known once the worker is identified – for example, whether they are in business on their own account.

“If HMRC wants to side-step IR35, and only offer on-payroll positions to hire people, they can of course, which is effectively a blanket ban on contractors who provide services. The consequence is that it will cost them more and reduce the size of the talent pool available to them.”

Treasury cracking down

In line with the Tax Policy Making framework, the Treasury published in July a number of draft legislation measures to consider ahead of the next Finance Bill.

Specifically on tax avoidance, the Treasury is proposing:

  • to double maximum sentences for the most egregious cases of fraud from 7 to 14 years to crack down on tax fraud and deter criminal actions
  • to introduce tougher measures on promoters of tax avoidance, publishing draft legislation which creates a new criminal offence that will apply to promoters of tax avoidance schemes who fail to comply with an HMRC legal notice requiring them to stop promoting an avoidance scheme. The government is also publishing draft legislation which will enable HMRC to apply to the court for a disqualification order against directors of companies involved in promoting tax avoidance.

Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance said:

“Whilst we welcome any measures to prevent and deter tax avoidance, it has become apparent to me that HMRC is not naming any companies on their ‘Stop Notice list’* which means that those companies can continue to pedal criminal schemes and get away with it.”

Temple said that doubling the prison sentences will “not serve to deter these criminals who are arrogant enough to think they will never get caught, particularly at the speed with which HMRC operates. ” 

“I have said it before and I will continue to say it, enforcement is key and HMRC has all the data it needs to catch the perpetrators but they need to proactively tap into that data as a matter of urgency to quickly identify them, close them down and stamp out tax avoidance once and for all,” said Temple.

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