Our expert, Brian Burke examines the latest publication from HMRC
It’s 40-odd pages long, but the first thing that ought to strike even the most rapid reader of HMRC’s new call for evidence to “tackle disguised remuneration (DR) tax avoidance” is the lack of separation between the innocent and not so innocent, writes Brian Burke, a director in our restructuring and insolvency team.
Indeed, it’s disappointing that the consultation document does not appear to draw a clear distinction between those who have historically been embroiled in disguised remuneration schemes and those, who despite the changing tax landscape and introduction of legislation over the course of many years have elected to (and continue to), utilise schemes despite the warnings by HMRC. Personally, I feel that there is a marked difference as the former have usually followed advice given at that time, with some driven by previous changes to IR35. It would appear that some MPs agree, as that feeling looks to have motivated their NC31.
On a more positive note, it is pleasing to see some recognition by HMRC with regards to the many engagers, intermediaries and umbrella companies that are wholly compliant, along with a large number of contractors who continue to legitimately use personal service companies and meet their tax liabilities diligently.
Additionally, the HMRC consultation appears to recognise that there is considerable benefit to businesses and acknowledges that they should have the ability to utilise contractors as is appropriate to their business, to meet their needs.
As a result, we believe any future actions from HMRC need to be focused on addressing the core, existing issues without exerting new pressures, compliance burdens, or costs to those contractors and other taxpayers who are already acting reasonably as well as responsibly.
Interestingly, according to the consultation:
- The majority of DR schemes today are used by taxpayers who provide their services to a third party, while working through an employment intermediary such as an umbrella company.
- Due to the concentration of DR schemes being used through employment intermediaries, the government is interested in exploring the role of employment supply chains in the proliferation of DR schemes, and whether it should take further action to tackle any issues in this market.
It should be noted that before the radical suggestion of getting the supply chain involved, there is much from the government in the consultation in respect to the actions that have already been taken, plus a look at legislation enacted already to disrupt and eradicate mass-marketed schemes.
On the basis that HMRC are seeking to protect the taxpayer, not legislate further against individuals , I should like to see an approach from tax officials which is designed to engage positively and that, in practice, will protect contractors -especially given that they are the party that is most at risk, as it is the individual who becomes embroiled in HMRC action and who faces significant tax liabilities as a result.
In the event that a contractor is not having PAYE and NIC deducted (that is, is not caught by IR35), would it not seem sensible that they should be required or obliged to approach HMRC for approval and clearance of a certain arrangement? For any period in excess of a sensible window of time (a month/four weeks)that it takes HMRC to confirm their acceptance or otherwise of their terms of engagement, the individual taxpayer or contractor should be subject to an amnesty so that no additional personal tax liability arises.
On the basis that they have to provide suitably detailed information to HMRC, this process would swiftly highlight to the department where a DR scheme was being marketed, and additionally it is likely that multiple participants would come forward seeking approval for the same scheme. Suitable powers could be provided for HMRC to obtain details of the other participants and there are existing powers available to deal with promoters and enablers.
And, should a contractor not seek such approval and clearance, then under this envisioned process, they do not obtain the benefit of the amnesty. So ultimately the responsibility falls to the individual to engage rather than the employer, umbrella or intermediary.
This process could be conducted online via the completion of a questionnaire/clearance request with a receipt of acceptance for a contractor’s records and subsequent approval being issued. Engagers could request copies for their records, should they wish, where a contract is to be extended (as is often the case). Additionally, where there is a change of payment mechanism, the individual could seek similar approval or clearance with this to be granted ideally prior to effecting transition.
It may be a simplistic approach, but it is the contractor who is ultimately impacted and so this is where HMRC should act -in a supportive capacity. History has demonstrated that contractors were following the advice that was made available to them, and that their understanding was often that the payment arrangement (DR scheme) was effective and approved. The consistent point is, compared to the deduction of PAYE and NIC, that any new DR schemes being offered will promise a tax saving and thereby deliver enhanced income. As contractors might therefore now be vulnerable, coming out of the Coronavirus pandemic with little financial support from the government, the taxman should use this consultation as an opportunity to move away from reactive efforts to take DR and towards proactive efforts to protect contractors and other affected taxpayers, especially now that such a large number of HMRC customers have exited these schemes completely.