A recent HMRC win in the Court of Appeal resulted in an IT contractor having to settle his Income Tax liability following the use of a disguised remuneration tax avoidance scheme. He had entered into an arrangement whereby he worked through an Umbrella company based outside the UK whilst providing services to UK-based financial service companies. The contractor received most of his earnings in the form of loans, which were claimed not to be taxable and were set up through the umbrella company.
And last week HMRC updated its list of named tax avoidance schemes, promoters, enablers and suppliers, adding Peak PAYE Limited after it identified the London-based company as a tax avoidance scheme, despite promoting itself as an Umbrella Company. It was offering take home pay of 80-85% through an ‘Option Grant’. If you choose to use such a scheme you, as the contractor, are opening yourself up to huge tax liability exposure. If you currently believe that you may be involved in a tax avoidance scheme, we advise that aside from stopping immediately and engaging with a compliant Umbrella provider, such as PayStream, you consult HMRC's interactive risk checking tool and then contact HMRC directly.
It’s worth remembering that these type of arrangements remain firmly in the sights of HMRC, and it’s unlikely that those that choose to use such schemes or indeed those that end up using them without fully understanding the tax-avoiding implications, will be able to successfully defend a claim for unpaid Income Tax liability in the courts.
HMRC are taking action
Where loan schemes have been used to avoid tax HMRC has the power to close down these schemes and/or to recover money from promoters or facilitators of these schemes. This also includes recovering tax from recruitment businesses as the “first intermediary” (under the Onshore Intermediaries Legislation). This week a Director of a non compliant Umbrella company was disqualified for 8 years after the company was found to have links with the Isle of Man. The company was offering take-home pay of £90,000 from £100,000 of income. This phrase comes up time and time again but if it looks like a duck, swims like a duck, and quacks like a duck… it’s probably a tax-avoidance scheme.
However the long-awaited Employment Bill failed to get a mention in the Queen’s Speech on 10th May 2022. With employment rights continuing to be on the public agenda, Stakeholders not only working within Umbrella, but across wider industry, were expecting some movement on this three years after it was first announced in the Government’s 2019 Queen’s Speech. That was not to be, with the Government later advising that it would be introduced when Parliamentary time allowed (again – for the 20th time or thereabouts?).
Penalties can spiral quickly
Penalties for falling foul of any of the aforementioned can spiral quickly. For agencies and contractors, these risks can be eliminated by working with a compliant Umbrella or Accountancy provider like PayStream. Under our Umbrella model, we operate PAYE and account for National Insurance contributions – so no unexpected tax bills. Our Accountancy service provides you with the tools necessary to effectively manage your PSC. And our IR35 Comply service helps clients to comply with off-payroll regulation, providing working practice / contract reviews and clear and practical IR35 advice.
The Single Enforcement Body is long overdue
We have always been supportive of one particular proposal – the introduction of a Single Enforcement Body – and its remit to protect workers’ rights and to clamp down on the unscrupulous behaviour of a small minority of Umbrella providers that do not abide to the same standards upheld by the majority of the industry.
Many of those operating as they should be are assessed by industry self-regulators FCSA or Professional Passport, who each carry out regular and rigorous assessments, looking at financial stability, legal compliance and employee rights, amongst other things. But we want to see the Government deliver on its promise and introduce the Single Enforcement Body, with real enforcement teeth, so that compliant Umbrella providers can fully focus on what really matters – delivering an employment and payroll solution that delivers for the huge number of contractors that UK businesses are increasingly relying upon.
