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  • Crawford Temple

Is HMRC making the disguised remuneration marketplace worse?

Recently, following the implementation of the new Off-Payroll rules within the private sector particularly, we’ve noticed an increasing number of contractors who’ve chosen to work through umbrella companies. However, not all umbrella companies are equal, and it’s been brought to our attention that many contractors have been unwittingly coerced into signing up for tax avoidance schemes in the pretext of disguised remuneration schemes.

Is HMRC doing enough?

Put simply, there’s more that could be done.

Suspect schemes continue to proliferate and Her Majesty’s Revenue and Customs seems to not be clamping down on them resolutely or quickly enough, despite having information which would enable it to do so.

In the meantime, however, HMRC has found time to use increasingly forceful tactics to warn contractors that they may have joined a tax avoidance or disguised remuneration scheme, which, in itself, can be taken as a timely reminder of the dangers of such schemes.

However, in focusing on the contractors, not the promoters of such illegal schemes, HMRC’s focus seems skewed, and may actually incentivise the promoters. It seems to be a counter-productive strategy and not one that will encourage tax recovery.

In a recent letter to contractors, HMRC highlights that they are taking action to challenge those promoting tax avoidance. However, they also state that contractors are responsible for ensuring their own tax affairs are correct. According to the HMRC, employers should ensure that the right amounts of tax and NICs are paid to them for the earnings. However, HMRC also states that there are certain circumstances where contractors are responsible by law to pay them.

Clearly, the implication of such letters is that the liability to pay tax rests with the contractor, and it is deliberately designed to put ‘the frighteners’ on them in an attempt to encourage them to leave such schemes, if they are indeed part of one. The underlying message here is sound and sensible and such workers are urged to leave illegal schemes as soon as possible. However, we detect a more cynical undertone between the lines of these letters.

Forewarned is forearmed

UK Tax law is clear that an individual is responsible for their own tax arrangements. However, this is superseded when they are employed by a company who operates PAYE on their income. Furthermore, HMRC can legally challenge this principle IF it can prove that the employee was fully aware of the arrangement at the time.

We now ask whether these sinister HMRC letters warning employees about tax avoidance are a way for HMRC to strengthen its argument about recovering unpaid taxes from an employee simply by inferring that because they were warned they must have been aware?

Following on from the Loan Charge fiasco that we’ve witnessed over the last few years, in which lives have been lost and livelihoods destroyed, HMRC could have been encouraged by its actions against contractors involved in loan arrangements. For example, the HMRC may believe the most cost effective and simplest method to recover ‘lost’ taxes.

What about the employer?

Another excerpt from the letter states, “…we believe they may have become involved in tax avoidance…”. ‘They’ meaning the employer. If this is the case, many will be looking to see what action HMRC intends to take against these employers.

HMRC must have firm grounds for suspicion if it is writing to an employee using such strong and intemperate language. So, many will be questioning why HMRC has not used the full force of its powers to protect itself from suspect providers. It could be seen that only contractors have been targeted while the providers continue to operate openly within the marketplace with little or no action or enforcement taken against them.

How can HMRC recover unpaid taxes?

The first target of HMRC’s strategy must be the employer.

  • Most disguised remuneration schemes simply do not operate PAYE correctly on behalf of the employee and they also attach erroneous labels to the untaxed amounts in an effort to obfuscate. If the employer has done so then HMRC must seek to recover the underpaid amount from the employer not the employee

  • A scheme whereby HMRC also requires a company to lodge funds with it to protect itself against potential losses must also be considered. If an employer fails to comply, HMRC would then be in a position to prevent it from trading

  • It’s also within HMRC’s power to transfer the liability to the directors of such companies, as a personal liability. It would then be able to recover the money from the director’s personal assets

  • In cases where a recruitment agency has been involved in the employment process and HMRC are still unable to recover the liability from the employer, HMRC could seek redress from the agency. This would be technically possible because not all the income has been applied as employment income, thereby failing to meet the conditions in the legislation and allowing liability to pass back to the agency.

Is new legislation the answer?

We’re now at a point where a bottleneck of muddled legislation has hindered the workforce and the wider supply chain, rather than serve it better. HMRC, however, believes that new legislation will improve things.

Some may wonder if the suggestions are politically motivated and designed to both deflect from the lack of action on tax avoidance and disguised remuneration, and provide snappy soundbites.

We would suggest that rather than bringing in even more legislation HMRC should more effectively use the powers that it already has.

Unfortunately, we find it difficult to find any positives in the handling of this situation from either Her Majesty’s Government or HRMC.

There seems to have been no action taken against the Loan Charge fiasco, despite the findings of enquiries that have recommended change or redress. According to some, there are rumours that workers involved in the Loan Charge are finding that their loans have been sold on to companies who are now seeking repayment. This leaves the workers who paid their taxes under these schemes in the worst possible situation, having no recourse to or support from the government.

The inferences of this are that the Government continues to avoid pursuing the promoters of these illegal schemes and are, in fact, persisting with the argument that their strategy of seeking recovery from the workers is the best way forward.

Accountability is urgently needed

Whether or not our perspective is correct, we continue to see extremely high levels of disguised remuneration in the market, with many names occurring repeatedly. Despite this practice continuing, and its perpetrators being clearly identifiable, HMRC looks to still be unwilling to act against them.

It’s clear that this matter needs to be addressed; taxes contribute towards a healthy society and when some enrich themselves from others’ earnings without accountability, placing the onus instead on those who acted in good faith, something is very wrong indeed.

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