HMRC seek to understand contractor tax avoidance arrangements

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On 23rd April the Government published a report by IFF research, commissioned by HMRC to aid their understanding of tax avoidance schemes used by contractors and importantly how contractors are targeted by these schemes.

The report was initially published by IFF research on 27th June 2018 and you can find the full report here.

Despite being almost two years old and using a relatively small sample of contractors and recruitment agencies, the report raises some important issues that are, disappointingly, still relevant today. Thankfully, the report recognises the importance of industry bodies such as the FCSA in driving compliance and raising awareness of these schemes.

What are tax avoidance schemes?

Tax avoidance schemes bend the rules to gain a tax advantage that was never intended. Often operating within the letter but not the spirit of the law. Typically, the scheme promotor will claim to exploit some loophole in the tax system for the benefit of the contractor, often with disastrous consequences for the individual further down the line when HMRC launch an investigation.

What was the purpose of the report?

The report was commissioned by HMRC to help them to understand contractors’ motivations for entering tax avoidance schemes and explore how contractors are targeted by tax avoidance scheme promoters. The findings from this research will be used to help support HMRC with their objective to ‘maximise revenues due and bear down on avoidance and evasion’.

Confirming once again that taking action on tax avoidance is high on the agenda for HMRC. The report references that of the estimated £33 bn tax gap £1.7bn is due to tax avoidance.

What were the key findings?

The report found that the degree to which tax avoidance is discussed within employment agencies varied considerably and there were mixed levels of awareness surrounding tax avoidance schemes.

Whilst some recruitment agencies reported a reduction in the number of umbrella companies contacting them to promote tax avoidance schemes, some reported an increase in the prevalence of tax avoidance schemes in their sector. Reporting that their agencies unwillingness to engage with these schemes was costing them money as contractors would instead choose to work with recruitment agencies that would engage with these non-compliant schemes.

Reassuringly most of the agencies surveyed confirmed that umbrella companies must go through a rigorous audit process before they would engage with them. Some insisting that their workers use only FCSA approved umbrella companies offering peace of mind to the recruitment agency and their contractors.

All the contractors interviewed had used a tax avoidance scheme, most stating that they had unwittingly become caught up in the schemes believing them to be perfectly legal. When asked why they entered these schemes contractors stated they were attracted by a higher take home pay and lower administrative burden, they were also reassured by repeated false claims by the scheme promoter of HMRC approval.

The contractors surveyed reported that they viewed tax avoidance as prevalent within the contractor community and very much a normal part of contracting. This is deeply concerning. HMRC must do more to raise awareness within the contracting community who are often referred to these schemes by other contractors. The report concluded that HMRC should continue to work closely with FCSA to raise awareness within the recruitment industry.

What do we think?

Parasol welcomes any move to raise awareness of such schemes and through our role as board members of FCSA we actively engage with the recruitment industry to raise awareness of such schemes and drive compliance within the industry.

If you’re concerned about these types of schemes, believe you may have been caught up in one or would like advice on how to spot them, please get in touch with our expert team.