HM Revenue and Customs (HMRC) must do more to reduce the exposure of contractors to tax avoidance-focused disguised remuneration schemes, the House of Lords Economic Affairs Finance Bill Sub-Committee has concluded.
In a letter to the government, the committee welcomed the ramping up of HMRC’s clampdown on peddlers of disguised remuneration schemes, as demanded in the December 2019 independent review of HMRC’s loan charge policy, overseen by Sir Amyas Morse.
The Morse Review set out to ascertain whether the loan charge is the most appropriate vehicle for the government to clamp down on people who take part in loan-based disguised remuneration schemes in the interests of minimising the amount of employment tax they have to pay.
Such schemes see contractors remunerated for part of the work they do in the form of non-taxable loans, in lieu of a conventional salary, with the loans typically managed by a third-party offshore employee benefits trust (EBT).
In the 2017 Budget, the Treasury introduced the loan charge policy to recoup the tax it claimed scheme participants had avoided paying, on the basis that these loans were never intended to be repaid, so should be reclassified as taxable income.
The tax owed is known as a loan charge, and for many individuals caught by the policy (including thousands of IT contractors), the sums of money they are being pursued for by HMRC can be life-changing.
A recurring criticism of the policy is that it is too heavily weighted towards penalising the individuals who took part in these schemes, rather than the organisations that were responsible for running them and promoting them to contractors as a tax-compliant means of boosting their take-home pay.
In response, HMRC has come under pressure since the publication of the Morse Review to do more to direct its loan charge enforcement efforts at the promoters of these schemes, and has since responded by pledging to make legislative changes that will make it easier to clamp down on promoters and more difficult for them to market their setups.
The Lords committee said in its letter that it is still waiting to see “tangible and positive results” from HMRC’s efforts on this front, which to date have included taking action against scheme promoters using “misleading” online adverts to lure in contractors.
The letter made reference to how HMRC has “recently taken steps” to tackle the way promoters market their schemes to contractors through its work with the Advertising Standards Authority (ASA) and Google to have the offending adverts removed from the web.
The letter went on to detail further steps HMRC should take to tackle the continued proliferation of tax avoidance and disguised remunerations schemes at source, which were suggested by contributors to a series of evidence sessions held by the committee in December 2020.
This type of work is not without its challenges, as was acknowledged in the letter by Glyn Fullelove, immediate past president of the Chartered Institute of Taxation, who provided feedback to the committee.
For example, the promoters of these schemes are typically based offshore (and so beyond HMRC’s jurisdiction) and often shut up shop as soon as an investigation into their organisation is begun, said Fullelove.
“HMRC now recognises that there is a greater role for it in what you might call consumer protection,” he wrote. “It is now looking to stop more schemes at source than to follow up with taxpayers after the schemes have been implemented.”
The letter also contained feedback on the work HMRC has done with the ASA and Google from the Loan Charge Action Group (LCAG), which said scheme promoters are getting round these advert bans by tweaking their marketing messages so they can remain online.
At the same time, promoters are also directly marketing their schemes to contractors via email “on an almost weekly basis”, so there is a limit to how effective HMRC’s work with the ASA and Google will be.
“HMRC has merely referred some schemes to the ASA over the wording of the adverts. The promoters simply change the wording and continue to advertise,” said LCAG in its feedback.
The letter also made a case for end-clients and employment agencies to do more to protect the contractors they engage with from falling into disguised remuneration schemes by conducting due diligence checks on the firms that make up the end-client to contractor labour supply chain.
“We heard concerns that large employers were not sufficiently diligent in ensuring tax compliance within employment supply chains,” said the letter. “We were told that many employers who recruited workers [contractors] through agencies had no scheme or standard for working with agencies who are certified as tax compliant.”
At the same time, many employment agencies also outsource the running of their pay-as-you-earn (PAYE) payroll to umbrella companies, which then assume responsibility for ensuring the correct employment tax deductions are taken from the contractor’s gross pay.
As previously reported by Computer Weekly, there are well-documented examples of umbrella companies being used as a front for disguised remuneration schemes, which is another matter of concern raised in the letter.
Although there are many legitimate and tax-compliant PAYE umbrella companies operating within the end-client to contractor labour supply chain, it can be difficult for contractors to tell the difference between those that are operating within the tax rules and those that are not.
Therefore, end-clients and employment agencies should be doing more to vet the umbrella companies they work with to protect the contractor community, especially as the incoming private sector IR35 reforms are likely to lead to a surge in the number of contractors made to work via umbrella companies.
That is according to Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), who also gave evidence to the Lords committee’s inquiry into the loan charge policy.
“In 2017, the rules on IR35 in the public sector changed,” said Chamberlain. “That meant there was an increased usage of umbrella companies. What worries us is that in April , when the private sector rules come in, we will have the same problem… thousands of people are going to be pushed into umbrella companies. They are not regulated, and some of those people will, unfortunately, fall into the hands of these scheme promoters.”
The letter also referenced evidence uncovered by the LCAG campaign group, via a Freedom of Information (FOI) request, that HMRC has previously engaged contractors that take part in disguised remuneration schemes.
Mary Aiston, director of counter avoidance at HMRC, confirmed the contents of the FOI request in the letter, and said HMRC had identified “15 occasions” when a contractor working for HMRC had simultaneously been signed up to a disguised remuneration scheme.
“Of those 15 people, five had already stopped and we took immediate action to end the contracts of the other 10, so they were no longer working with us,” she said.
“We are clear with the agencies that we work with that they need to meet the certain standard. If we found the agency was not, then that is something we would take very seriously.”
The letter went on to acknowledge that HMRC has made some progress in addressing other areas flagged for concern in the 2019 Morse Review, as detailed in HMRC’s own report, published in December 2020, that set out the work it is doing to improve the policy’s implementation.
This work included taking steps to improve “communications with taxpayers” and “progressing settlement arrangements”, as well as acting on the Morse Review’s recommendation to curtail the length of time the policy covers by 10 years, said HMRC.
Even so, the letter stated that “far too many” shortcomings in regard to HMRC’s implementation of the policy remain, and it has not made enough progress to date on addressing them.
Lord Bridges of Headley, chair of the Finance Bill Sub-Committee, said in a statement to accompany the letter that what HMRC “commits to doing” is often not reflected in the experience contractors claim they have when engaging with it on loan charge-related matters.
“It [HMRC] has improved, but it needs to implement properly the recommendations of the Morse Review,” he said.
“We welcome that HMRC is doing more to tackle disguised remuneration schemes at source, including the marketing of these types of scheme through its work with the Advertising Standards Authority. However, it must do more to reduce the exposure of taxpayers to such schemes in the first place. There should also be a renewed focus on ensuring consumer protection and preventing the mis-selling of schemes.”
In direct response to the evidence revealed by LCAG about HMRC’s past use of contractors enrolled in disguised remuneration schemes, Bridges added: “HMRC should practise what it preaches and take further steps to avoid using employment agencies and contractors that use disguised remuneration or other tax avoidance schemes.”
Computer Weekly contacted HMRC for a comment on this story, and received the following statement from a departmental spokesperson:
“HMRC has reported on the action which they have taken to successfully implement all of the 19 accepted recommendations of the Independent Loan Charge Review,” the spokesperson said.
“HMRC remains committed to ensuring that everyone pays the tax they owe, including tackling the marketing and use of disguised remuneration tax avoidance schemes. We thank the committee for their letter and will be responding in due course.”