HMRC spent 6.5% of its £6.8bn annual budget fighting tax avoidance, according to its 2022/23 expenditure report. For some people, this isn’t enough.
They feel the tax authority should be spending more of its budget on “stopping the proliferation of tax avoidance schemes posing as umbrella companies,” one individual tells The Freelance Informer.
That expenditure arguably did not put a dent in the number of dodgy tax avoidance schemes still operating and putting contractors at risk. During the scope of the reporting period, the tax office named just 27 promoters and 5 directors, alongside details of the 31 schemes they were promoting. 13 ‘Stop Notices’ were also issued, which require promoters to stop selling or promoting a scheme.
I see £451m as a considerable amount of taxpayer money that could have been spent instead on the necessary expertise to regulate the umbrella industry. It baffles me that an industry that tricks hard-working people and the government out of millions of pounds each year is propped up by public sector department hiring practices.
Countdown to counterproductvity
Based on recent reports, there seems to be a trend whereby government hiring teams are all too happy for their contractors to work in the unregulated umbrella industry so they can generate tax through PAYE rather than allow contractors to remain self-employed.
To me, it seems counterproductive to use taxpayer money this way. I put my musings to contractor specialists that have put their concerns about Off-payroll hiring practices and tax avoidance schemes to HMRC.
“It’s a ridiculous situation, frankly,” Seb Maley, CEO of Qdos tells The Freelance Informer.
“The government was insistent that widescale non-compliance was taking place so introduced the off-payroll working rules, which has effectively forced more workers into an unregulated industry – an industry where tax avoidance takes place. By attempting to fix one perceived problem, the government has exacerbated another,” says Maley.
Why are the self-employed being demonised?
Julia Kermode, CEO of PayePass, a contractor compliance expert, also shares her thoughts about how public sector departments are not managing off-payroll recruitment practices fairly.
“I can only imagine that public sector bodies are encouraged to engage contractors via umbrella companies rather than through personal service companies,” says Kermode. “This is a very short-sighted way of managing – or more accurately, not managing – the off-payroll rules.”
“She continues, “However, if this is a wholesale policy then it’s wrongly demonising self-employment which is a perfectly legitimate way of working. Umbrella companies offer an incredibly valuable service, both to workers and businesses, but that’s not to say contractors should be forced into working this way.”
There are many compliant and honest umbrella companies out there, but also far too many dodgy operators that lure in unsuspecting workers only to leave them with “devastating tax bills” further down the line says Kermode.
She tells The Freelance Informer that the government is well aware of the problems in this sector but, for whatever reason, is “doing little about putting a stop to these schemes,” she says.
“The solution is relatively simple,” she says. “Deliver on promises to regulate the industry or, failing that, cut off their route to market by finally taking action against the financial incentives and bribes which are rife, and only affordable to dodgy players,” suggests Kermode.
Disastrous consequences that could be avoided
In recent months, the government published draft legislation which would mean the most persistent promoters of tax avoidance could be issued with unlimited fines and imprisonment for up to two years if they fail to comply with a ‘Stop Notice’ issued by HMRC.
Kermode believes if proper enforcement had been in place, the government would not have brought in its “draconian Loan Charge policy”, which in her eyes has “had disastrous consequences on tens of thousands of innocent people who are being pursued for unpaid tax. “
“The return on investment from preventing tax avoidance schemes is huge, and the resulting income would more than cover the costs of doing so – it’s a no-brainer.
Every time the subject of why the government is delaying the regulation of the umbrella industry, the school song “Why are we waiting.?” comes to mind. Will 2024 be the year that draft legislation turns into proper regulation? Let’s see.
In the meantime, I’ll have to divert my thoughts to get that song out of my head.