At the end of 2021, the Government appealed for evidence to better understand how the umbrella company market operates. The consultation closed on February 22nd 2022 and the industry awaits its findings. Crawford Temple is CEO of Professional Passport, the UK’s leading independent assessor of payment intermediary compliance and he welcomed the call by the Government as a genuine attempt to try to understand the challenges that the industry is facing.
Since the roll-out of the Off-payroll legislation in April 2021, the industry has seen a rise in the proliferation of disguised remuneration schemes purporting to be umbrella firms. They have duped many contractors into working with them and Crawford Temple is urging the Government to address the issue of disguised remuneration schemes as a matter of urgency. Here, he outlines some suggestions that will help the Government to shut down the schemes and clean up the industry.
1. Proactive use of existing data
How to use and correlate the existing data to act more swiftly and close down DR operators whilst at the same time protecting the workers.
2. Update Intermediary Reporting
Simple updates that allow better analysis of data to identify potential DR operators
3. Protecting the integrity of the compliance review
Working closely with compliance standards to prevent large scale market access to the DR operators
Proactive use of existing data
Seemingly, there is a lack of proactive use of existing data to identify issues quickly and use existing powers to prevent the proliferation of these arrangements. However, Real-Time Information Reporting on all PAYE payments made to employees was introduced in 2013, which provides HMRC with the exact amounts paid to employees under PAYE and the taxes applied. Then, in 2014 Intermediary Reporting was introduced providing HMRC with quarterly data on the amount that every recruitment company paid to all workers where they themselves did not operate PAYE.
How difficult can it be to build a reporting tool that cross-checks these two datasets to provide HMRC with real-time information on where unexplained, and significant differences occur?
Once a provider is identified as a potential disguised remuneration scheme operator there are many powers that HMRC can apply to protect themselves, and the workers, from future losses or liabilities.
So why hasn’t this happened already?
At a guess, could it be that HMRC has no incentive to proactively find these arrangements, as whenever they are found they can seek recovery from the individual taxpayer, which has been the case with the recovery of taxes under the loan charge? This approach ruins the lives of the individual taxpayer and leaves those that have offered and promoted the arrangements, and made significant amounts of money in doing so, free to keep all the money they have made through their false promises and reassurances.
HMRC needs to proactively identify these arrangements and be encouraged to penalise the promoters and not the individual taxpayer. This will prevent further damaging loan charge style cases in the future. We believe the answer to this is simple – and lies within the rules around Self-Assessment.
Under Self-Assessment, where a return is made with full disclosure, HMRC has a limited period to open an enquiry. If they fail to do so, their opportunity is lost, unless they can show that some information was missing and, had they been provided with this they would have reached a different answer, known as Discovery.
If a similar rule was put in place around the correlation and use of HMRC data, we believe the situation would change.
We propose that a new rule is implemented that where HMRC has all the data and has failed to follow up on this they should be prevented from seeking recovery from the individual taxpayer and recovery should be limited to the promoters of the arrangements. The definition of promoter already exists in tax avoidance legislation and would seem a good starting point. We would also suggest that the rule prevents recovery from the individual taxpayer if action is not taken within a year.
This time limiting factor prevents individuals from being in a scheme for a prolonged period and facing huge future liabilities at some point in the future. It would also mean that many could be notified within a few months of entering the arrangements meaning the tax liabilities do not become life-changing amounts of money.
Update Intermediary Reporting
We would also advise an update to the Intermediary Reports so that umbrella companies used are specifically referenced in the report.
Professional Passport has identified situations where non-compliant providers gain a foothold in a market and very quickly acquire high levels of workers through word of mouth. Whilst recruiters should be in a position to identify where this is happening and raise red flags this is not always the case.
By extending the specific reporting requirements in this area, HMRC will be provided with further information that can be used to identify potential disguised remuneration schemes. Coupled with the matching of RTI returns on a quarterly basis will severely hamper market access for these providers.
Protecting the Integrity of Compliance Reviews
The Criminal Finances Act has arguably had the most significant impact in moving compliance in the supply chain up the agenda. We are now in a position where many recruitment companies and end clients are requiring some form of accreditation before allowing providers to enter the supply chain.
Now that the market has moved compliance up the agenda it is becoming increasingly important that the integrity of the compliance reviews is upheld. With commercial and financial gains in the market being so significant, unscrupulous providers will continue to find new ways of disguising the reality of what they are doing in an attempt to gain accreditation. The accreditation provides much greater access to the market and therefore greater rewards. The rewards are not only for providers offering these arrangements, but recruiters can also achieve significant market share growth where they can present higher returns to workers whilst at the same time meeting contractual obligations to use accredited providers.
So, in the worst-case scenario, you have a recruiter looking to gain commercially and financially, a provider seeking to gain commercially and financially and a worker seeking to gain financially by increased take-home pay. These incentives should not be underestimated and require a new approach and new thinking to minimise risks. This also needs to be coupled with visible enforcement.
If the answer is not found, compliance accreditations will lose their appeal and the market would return to the unstructured environment we saw previously. It is in the interests of the unscrupulous providers to make that happen.
I do believe this is not difficult to solve in the short term and, if solved, could considerably limit the access to the market for these disguised remuneration providers. That in turn makes it less attractive for them to operate.
Yes, it is encouraging to hear that the Treasury, HMRC and BEIS will be working together to address the issues and it is pleasing that they want to hear a broad range of evidence from a whole host of audiences and stakeholders. However, it is important to stress that whilst policymakers are working out a more informed approach to the workings of the umbrella sector, I would like to remind them that disguised remuneration schemes and tax avoidance schemes are continuing to thrive. And they need to be stopped.
