- What could happen to the UK’s freelancer economy if recruitment agencies and end clients start getting fined by HMRC if their freelancers/contractors are linked to a tax avoidance scheme?
- Will freelance job boards, recruitment agencies and even end clients ever get stuck with umbrella company tax avoidance scheme fines and unpaid PAYE or will HMRC tend to target contractors?
Here’s what IR35, compliance and tax experts have to say on the evolving saga of tax avoidance schemes. Be warned, you might not like what you learn.
“If a tax avoidance scheme has been identified, in some situations – under the Corporate Criminal Offence rules – a liability could, in theory, be placed on other parties in the supply chain, whether a recruitment agency or end-client,” explains Seb Maley, CEO of contractor insurer Qdos.
While technically a threat, I’d be very surprised if recruitment agencies and end-clients faced fines for contractors operating via tax avoidance schemes. Of course, it should never be ruled out, but as we’ve seen under the Loan Charge, HMRC tends to target the contractor.Seb Maley, CEO of contractor insurer Qdos
Should something be done now to stop major blockages for freelancers to remain independent?
Maley explains that in the past, contractors often found themselves caught up in tax avoidance schemes because they’d been promoted by the agency – which would receive a fee from the tax avoidance scheme.
“In my opinion, it makes sense for there to be rules which seek to penalise this practice,” he says.
Dave Chaplin, CEO of tax compliance firm IR35 Shield calls it as he sees it:
Where an agency and scheme provider have colluded in pushing a contractor into a scheme where they then siphon off money which is not theirs into their own pockets, then this is a criminal deception which is intended to result in their own financial or personal gain. It is fraud.
“HMRC has failed to solve this issue for decades and instead of pursuing the perpetrators have instead gone after the victims of the deception,” said Chaplin.
This encourages the scheme providers more. HMRC should step aside and let the Serious Fraud Office (SFO) take charge,” said Chaplin.
The definition of promoter has changed
Graham Webber of tax specialists WTT refers to two recent cases appearing in the First-tier Tribunal, which have highlighted the shortcomings of promoters of contractor tax avoidance schemes.
“In 2006, HMRC introduced a law that required promoters to register their scheme under the Disclosure of Tax Avoidance Scheme (DOTAS) rules. Failure to do so within time limits would lead to penalties. Over the years the definition of a ‘promoter’ has expanded; more parties have been required to make a disclosure; penalties have increased,” says Webber.
He noted to The Freelance Informer that the more egregious of the penalties recently confirmed by a Tribunal exceed £1m.
“This was applied to Hyrax Resourcing Ltd who promoted a contractor scheme of the same name. It’s worth mentioning that the connections of that company to the Peak Performance Group was highlighted and it’s understood that the scheme was sold via the network they established. Penalties were also issued (and confirmed) on Smartpay Ltd which is a member of the “informal” group of Isle of Man-based companies connected to Knox House trust and AML,” said Webber.
These penalties are applied to the PROMOTER. We have never seen a contract between an individual contractor and a PROMOTER (or any other party in the transaction chain) which would allow a transfer of the penalty to the contractor. The penalty arises due to a default on the part of the promoter and no fault lies with the contractor.
More concerning matters are brewing
However, Webber says there is a more concerning situation developing for contractors due to another HMRC initiative. To their credit, he says, HMRC is naming and shaming schemes that they consider to represent a significant risk of tax avoidance.
“Unfortunately, at least half of those so far identified have already ceased operating and at least two of the others have ceased since being named,” says Webber. We wait to see if the individuals behind them phoenix the arrangement under another name!”
More worryingly, HMRC, has named and shamed the entities as facilitating or being involved in PAYE tax avoidance, appears not to have raised any charge against them for outstanding PAYE.
There are claims for unpaid VAT and corporation tax, but not the root of the naming and shaming – PAYE that should have been paid to HMRC.Graham Webber of tax specialists WTT
Many contractors may be thinking why has HMRC not lodged a claim for outstanding PAYE?
Webber explained in a LinkedIn post earlier this week, that it is because to do so would “allow users to claim a credit for that PAYE (as the law intends) and prevent HMRC from trying to claim tax from the users, who were perhaps as much in the dark as HMRC appear to have been for the last 12 months.”
“Something here does not smell right,” Webber said in the post.
But he does offer some reasoning why things are going the way they have.
“It may be the case”, Webber tells The Freelance Informer, “as we have seen with the HMRC approach to historic ‘disguised remuneration’ schemes, that a decision has been taken within the agency to try and collect tax due from individual users of the schemes, rather than from the employer – often the umbrella.”
HMRC claims that they have a wide ranging and unlimited discretion to remove the obligation of any employer (which may have arisen at any time since PAYE was introduced in the 1940’s) to deduct and pay to them PAYE and that they can apply this power retrospectively.Graham Webber of tax specialists WTT
However, Webber explains that they further claim that exercising this discretion “transfers” the income tax liability to the employee. Clearly, this is a mighty and dangerous weapon and if permitted to apply without checks and balances, could visit upon often unwitting users of “schemes” a tax liability that they had every right to assume was not theirs.
WTT Consulting is presently considering what actions those who used the named schemes and indeed all other umbrella scheme users, should take to protect themselves against retrospective and huge potential claims for tax, NIC and interest.
What’s it going to take to boost due diligence?
Crawford Temple, CEO of Professional Passport, an assessor of payment intermediary compliance, says if more parties in the freelance recruitment and hiring supply chain were faced with fines for disguised remuneration (DR) schemes, it would “raise the bar for due diligence checks on third-party payment intermediaries and hopefully create the level playing field that the sector is seeking by eradicating those providers operating with shady practices.”
Temple suggests that should those in the supply chain be faced with the likelihood of paying fines, one route agencies could take is to explore setting up and running their own umbrella arms or offering “PAYE roles only” as the most effective way to actively manage the potential risks.
The latter option they will soon find does not attract the best talent or those who are set on taking only outside IR35 jobs.
Are the kickbacks perpetuating the problem?
Agencies have an important role in identifying non-compliant and disguised remuneration schemes, says Temple, and alarm bells should ring if incentives are offered for introductions for example. DR schemes purporting to be umbrellas can offer recruitment consultants for the introductions, regularly around £400 each, he says.
Clearly with umbrella charges typically around £20 per week it is difficult to understand how these large financial incentives can be offered through standard compliant offerings.Crawford Temple, CEO of Professional Passport
What is a ghost system?
Another trend, and perhaps a more worrying one as it is harder to spot, is where a provider operates a ‘ghost’ system.
Temple explains that these arrangements have providers seemingly operate compliant offerings with many workers engaged by a standard umbrella style arrangement.
“Contracts and evidence provided are from the compliant offering and so attract little concern,” says.
Temple continues, “Behind this is a separate offering that is only offered to workers who express a desire for higher returns.
“These non-compliant offerings typically fail to provide workers with pay slips or other comms relating to the breakdown of pay so these would have to be requested by the recruitment company directly from the provider. The examples provided do not reflect the reality of the arrangements and are designed to mislead.”
First signs that something is not right
In both arrangements mentioned above, recruitment companies will see a sudden increase in workers operating through a specific provider for no apparent reason.
“This can be the first sign that something may not be right,” says Temple. “It is vital that recruiters work closely with accredited bodies to ensure that any problems are addressed quickly.”
But even the accredited bodies have seen their own members get tied up in suspected and unjust practices, such as withholding contractor holiday pay.
Why isn’t HMRC using its data to spot DR schemes quicker?
And whilst recruiters have an important role to play in spotting a DR scheme, HMRC has its role to play too, suggests Temple.
HMRC has access to huge volumes of data through the employer’s payroll and agencies’ monthly intermediary reporting. This provides significant intelligence to help identify potential disguised remuneration schemes quickly.
HMRC needs to step up its enforcement activity to shut down these dodgy schemes once and for all.Crawford Temple, CEO of Professional Passport
The current economic environment has further fuelled the perfect storm created by the Off-Payroll rules and is likely to drive more ‘have I got a good idea for you schemes’ entering the market and offering falsely inflated returns to workers.
“If all parties worked more closely together it would limit the number of dodgy providers emerging onto the scene and minimise the risk of any fines being transferred,” suggests Temple.