HM Revenue & Customs (HMRC) has denied claims that it is squandering datasets that could improve the proactiveness of its enforcement efforts against non-compliant umbrella companies and reduce the exposure of IT contractors to tax avoidance.
HMRC is facing accusations of inaction in tackling the promoters and operators of non-compliant umbrella companies that offer contractors take-home pay rates that are only possible to achieve by employing known disguised remuneration mechanisms.
These payment mechanisms include processing a small part of the contractor’s salary through the umbrella company’s payroll to minimise the amount of income tax they pay, while the rest of the money they are owed is paid out in the form of a non-taxable loan or annuity.
According to Crawford Temple, CEO of Professional Passport, a company that provides compliance assessment services to umbrella companies, HMRC has two datasets that should be combined to shutter umbrella companies that pay contractors using disguised remuneration techniques.
“HMRC already holds all the information it needs to stamp out disguised remuneration schemes and rid the industry of criminal activity, but is not acting on it,” Temple told Computer Weekly.
The first of these datasets is generated by HMRC’s Real-Time Information (RTI) system, which was introduced in 2013 to provide HMRC with real-time updates on all payments made by employers to their employees, including details of income tax and national insurance (NI) deductions.
The second of these datasets originates from a system that was introduced by HMRC the following year that provides it with quarterly updates on the amounts of money paid out by employment agencies to contractors and payment intermediaries.
According to Temple, marrying up these two datasets would provide a digital audit trail for HMRC so that it could trace the payments made by an employment agency to an umbrella company, and ensure that when the umbrella pays the contractors on its books, that the correct amounts of PAYE and NI are being paid.
“Real-Time Information reporting, along with Intermediary Reporting, provides HMRC with two sets of data that give a unique insight into the market and supply chain,” he said. “Matching that data should set alarm bells ringing and help HMRC to identify a dubious provider and shut it down with immediate effect.”
Professional Passport, in conjunction with umbrella company trade association Prism, responded to HMRC’s call for evidence on how to tackle the proliferation of disguised remuneration schemes in September 2020 with details of how these datasets could be used for this purpose.
The letter, seen by Computer Weekly, acknowledged the efforts HMRC has gone to in recent years to put in place data-gathering measures that provide it with a “high degree of transparency” into the umbrella company marketplace where “disguised remuneration arrangements are prevalent”.
It stated: “While HMRC has the information, from the outside perspective, it appears this is not being utilised sufficiently or effectively.”
The letter went on to suggest that HMRC could make better use of the data at its disposal by working with contracting market stakeholders to identify umbrella companies whose behaviour might be falling short on compliance matters.
“Professional Passport [for example] has developed its own set of standards of compliance,” the letter stated. “Where a company fails to meet these standards, we do not say they are not compliant, merely that they do not meet our standards. This is where there could be an opportunity.
“By agreeing a process with HMRC, we could require any company seeking a compliance review to allow us to approach HMRC for information. That would allow HMRC to carry out a targeted review of both the [quarterly] Intermediary Reporting [data] and matched RTI returns.”
This information could be used to create a “pass or fail”-type test where rogue operators are confirmed and make it potentially easier for HMRC to shut them down, it said.
“While this does not provide a guarantee of compliance, as the provider could be more devious, it does provide an added level of robustness to the reviews, provides reassurances to the market on the integrity and depth of the reviews, and further limits access to dubious providers,” the letter added.
Temple confirmed to Computer Weekly that the letter is far from the only time the notion of combining these two datasets has been put directly to HMRC, as he has discussed it with the agency on a “number of occasions to bolster the compliance process” and remove non-compliant players from the market.
“And yet they [HMRC] seem unable to decide on anything that is outside of what has been done in the past,” he said. “They are unable to react anywhere near as quickly as the market, which will allow these arrangements to continue, albeit with a short shelf life.”
In a statement to Computer Weekly, HMRC said it does use data to keep tabs on organisations it suspects might be running disguised remuneration schemes, in the interests of warning contractors off joining them.
But the statement did not directly address Temple’s assertion that HMRC should be making better use of its datasets to remove non-compliant umbrella companies from the market.
“We already use data and other intelligence to identify potential avoidance schemes at an early stage, including umbrellas operating disguised remuneration avoidance schemes,” the HMRC statement said.
“In June 2020, we began contacting taxpayers who our Pay As You Earn Real-Time Information suggested had started to use these schemes. This helps make them aware of the risks of being involved in avoidance, so they can get out of it early before they have built up large tax bills.”
The statement added: “There is no reason for a contractor to use an agency or umbrella company that is not fully compliant with tax law. You don’t need to be a tax expert to spot an avoidance scheme – anything that sounds too good to be true almost certainly is.”
Concerns about the unregulated nature of the umbrella industry, and the high number of non-compliant players operating within the sector, have been repeatedly raised by contracting stakeholders in the run-up to the IR35 reforms coming into force within the private sector from April 2021.
From this date, medium to large private sector firms will assume responsibility for determining how each contractor they engage with should be taxed – based on the work they do and how it is performed.
Currently, it is up to contractors working in the private sector to decide for themselves whether the work they do and how it is performed means they should be taxed in the same way as a permanent employee would be (inside IR35) or as an off-payroll worker (outside IR35).
Working inside IR35 means contractors are liable for PAYE income tax and NICs, and individuals who receive that designation are often advised by their employment agencies or end-clients to work via an umbrella company.
As a result of this, the reforms look set to lead to a surge in the number of IT contractors that provide their services through PAYE umbrella companies.
In the months leading up to the reforms, Computer Weekly has reported on numerous instances whereby private sector firms have introduced hiring bans on limited company contractors, and imposed rules stating they will only use contractors that provide their services through umbrella firms.
Dave Chaplin, CEO of contracting authority ContractorCalculator, told Computer Weekly that HMRC’s current efforts to clamp down on disguised remuneration and non-compliant umbrella firms are not working, and it needs to do more to address the matter.
“Because of the off-payroll [IR35] reforms rolling out to the private sector in the next few days, 180,000 people are likely to be pushed towards the unregulated umbrella market, which is where the disguised renumeration schemes operate,” Chaplin told Computer Weekly. “I expect around 25,000 people to get caught up in non-compliant schemes as a result.
“Under the new off-payroll [IR35] rules, we are likely to see more contractors being required to work through umbrella companies and in an unregulated industry, we are likely to see more non-compliant tax avoidance schemes popping up to unwittingly dupe innocent workers into signing up and taking on considerable financial risk.
“These schemes mask themselves very well and while they are allowed to continue to do business as HMRC fails to close them down, sadly we will see more individuals becoming the victims, just as we saw happen with the loan charge. HMRC has a lot to answer for by not clamping down on these schemes quickly enough and is allowing them to thrive.”