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IR35: Government sets out plan to rid contractor market of non-compliant umbrellas and loan schemes

In the wake of a consultation earlier this year, the government has drawn up a package of measures it intends to take to help protect contractors from non-compliant umbrella companies and loan scheme promoters

The government has published details of the action it could take to rid the contractor market of non-compliant umbrella companies and loan scheme promoters, as part of its on-going efforts to clampdown on tax avoidance.

On the back of a consultation the government ran between 23 March 2021 and 1 June 2021, the government has published a set of proposals that would see it repurpose existing legislation and pass new laws that would give HM Revenue & Customs (HMRC) more powers to tackle tax avoidance scheme promoters.

Government estimates suggest there are between “20-to-30” promoters in operation who are involved in marketing mass-market tax avoidance schemes, and the vast majority (98%) use disguised remuneration techniques to enable participants to minimise their tax liabilities.

Participants in these kinds of schemes will be paid in part for the work they do in non-taxable loans or annuities, as a means of bolstering their take home pay, as they only pay tax on a relatively small amount of the overall sum they receive. Such schemes tend to be run as offshore employee benefit trusts, but the operators of them usually rely on UK-based, non-complaint umbrella companies to onboard contractors who may or may not know that they have been enrolled in a disguised remuneration scheme.

The past few months has seen a surge in the number of contractors working through umbrella companies, following the rollout of changes to the way the IR35 tax avoidance rules work in the private sector, which has given rise to concerns that more contractors may unwittingly have found themselves embroiled in tax avoidance as a result.

HMRC has attempted to clampdown on disguised remuneration schemes in recent years through the introduction of its controversial loan charge policy, which is focused on recouping the tax participants in such schemes reportedly avoided paying by opting to be paid in part for the work they do in the form of non-taxable loans. This has resulted in tens of thousands of contractors, including many working in the field of IT, being hit with life-changing tax bills, while the promotors of these schemes have largely gone unpunished.

The proposals put forward by the government seek to address that by giving HMRC renewed powers to shutdown promoters and curb tax losses by making it harder for these entities to use their off-shore states to hide their assets, for example.

Proposals for tackling promoters

One of the over-arching aims of the consultation is make it possible for HMRC to share information about specific promoters and tax avoidance schemes earlier than it currently can.

This, in turn, would allow HMRC to name umbrella companies that it suspects are “controlled by a promoter of tax avoidance” or are involved in other forms of non-compliance, so contractors can avoid them.

The fact that loan scheme operators are typically off-shore entities is frequently cited as a barrier to clamping down on their activities as HMRC’s enforcement powers do not extend to overseas operators.

To address this, the government has said it intends to direct its enforcement activities at the UK-based entities the operators use to market their loan schemes to the contractor community, which would include umbrella companies.

“The proposed changes would create a liability on promoters’ UK associates, to penalise them for assisting [the] offshore promoters’ activities,” the document stated. “The government is committed to maximising the deterrent effect of penalties so that facilitating or collaborating with an offshore promoter to see their scheme in the UK is no longer a viable entity.”

HMRC could also be granted new powers that would enable it to issue company winding-up petitions to expedite the removal of companies involved in “promoting or enabling” tax avoidance from the market, which could also include umbrella companies.

The consultation confirmed HMRC is already in discussions with the Department for Business, Energy and Industrial Strategy’s (BEIS) Insolvency Service about moving forward with this proposal, which would not require any legislative changes to push through.

Read more about IR35 and the loan charge

The consultation document also acknowledges that, to avoid detection and enforcement action, promoters frequently close down their companies and then reappear in the market under another name months later, making it difficult for HMRC to pursue them for any tax losses.

To prevent such a scenario from playing out, the government said it will allow HMRC to use its existing powers to issue asset freezing orders to prevent promoters from taking steps to dissipate their assets. This would also stop these entities claiming they have insufficient funds available to pay any penalties they are hit with.

Crawford Temple, CEO of umbrella company compliance assessment service provider Professional Passport, is one of 18 contracting market stakeholders to provide the government with feedback on the proposals during the consultation period.

In response to the proposals, Temple voiced concerns about the government’s decision to rely on legislative changes to give HMRC greater powers to take enforcement action against promoters.

“Yet more legislation is not the right course of action. A catalogue of legislation introduced over many years has resulted in a series of unintended consequences and much of it has not served to help and support the contracting sector and the whole supply chain for the better,” he said.

Government has ignored advice and recommendations from stakeholders and industry experts so that the legislation continues to fail to address the underlying issues and challenges that our industry faces, namely non-compliance, transparency and enforcement.  

“Non-compliance is fuelled by the complexity of the legislation and the current enforcement strategies do not work. In fact, they serve to incentivise non-compliant offerings and fail to support the compliant parts of the sector,” he added. “The lack of visible enforcement, the lengthy delays in taking any action, and targeting the workers for recovery all serve the interests of those seeking to circumvent, or disregard, the rules.”

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