HMRC knuckling down on umbrella companies & their promoters
As the net tightens around non-compliant umbrella firms, HMRC has now utilised its new legal powers to name tax evasion schemes and their promoters for the first time.
HMRC recently recognised tax evasion schemes to protect workers who may be enticed by programmes that promote lower income tax rates. Absolute Outsourcing and Purple Pay Limited’s Equity Participation Scheme were the first to be listed as part of HMRC’s new DOTAS (Disclosure of Tax Avoidance Schemes) initiative.
It has also been reported that HMRC has been chasing several contractors serviced by the accountancy group Churchill Knight. What is of concern to the industry is that Churchill Knight is in fact a member of the Freelancer and Contractor Services Association (FCSA).
According to the FCSA website, this trade membership organisation is “the UK’s largest membership group committed to increasing standards and supporting supply chain compliance for the temporary labour market.” Its objective, among other things, is to give tax compliance assurance to FCSA members’ customers, especially contractors, agencies, and hirers. All members must go through a thorough due diligence and evaluation procedure conducted by accounting and legal specialists. Its charter forbids members from entering into “arrangements that involve the member activities to include a managed services firm,” and its members must include all companies in a group.
Is this a widespread threat?
According to the FCSA’s CEO, ‘Churchill Knight & Associates was functioning no differently from an estimated 150 contractor accountancy businesses in the UK – utilised by hundreds of thousands of individuals.’
“This is concerning because it suggests that the problem may be widespread. Some of those accounting companies, like Churchill Knight, may be members of the FCSA, which views the practice as legitimate,” said Adrian Marlowe, chair of the Association of Recruitment Consultancies (ARC). Despite claims to the contrary, being a member of the FCSA does not imply compliance. Because both company and umbrella services are supplied, perhaps under the same trade name, and are jointly certified, MSC debt transfer may exist. The tax debt incurred may not be collected from responsible contractors or their MSCP suppliers.”
Also on the hot seat are promoters and facilitators
POTAS (Promoters of Tax Avoidance Schemes) and Enablers of Tax Avoidance Schemes will be added to HMRC’s list. These list sections are now empty but should fill up fast as additional schemes are discovered. When a promoter or other individual has notified a tax avoidance scheme, there is no time restriction on how long it may be on the list. Otherwise, the data will be kept on the system for 12 months.
A company name not on the list? This does not imply that it is risk-free
HMRC is eager to stress that their list of tax avoidance schemes is not thorough and that just because a plan isn’t on the list doesn’t mean it’s safe to engage with them. Other schemes, promoters, and facilitators of schemes will be added in due course.
HMRC has also asked individuals to fill out an online form if they have been part of a tax avoidance scheme or approached by a tax avoidance promoter or facilitator.
How does this affect my recruitment agency?
In 2007, HMRC introduced the managed services company (MSC) tax legislation. The goal was to prohibit accountancy service providers from using composite companies, costing the Treasury a lot of money. Instead, a managed service company provider (MSCP) (typically an accounting firm) set up and controlled these businesses as a tax-efficient corporate container for several contractors.
The recruitment supply sector was impacted since HMRC introduced in the Act the ability to transfer unpaid tax liability to the MSCP’s directors and “any other person who has directly or indirectly supported or been actively involved in the provision by the MSC. Of the individual’s services…” A recommending agency or a hirer are considered “any other person.” In simple terms, recommending persons to an MSCP might put the referring agency or hirer directors in direct conflict with HMRC if the tax debt is not paid. Therefore, putting recruitment agencies at risk of being pursued if their contractors are working under a tax avoidance scheme.
So, what is an Accounting Firm?
‘Umbrella companies’ or ‘payroll providers’ are terms used in the industry to describe accounting firms that engage with contractors, temporary workers, and agency workers. However, these descriptions might be deceiving. Although there is no legal definition, a real umbrella business is widely seen to hire its employees and pays them via the PAYE programme, so avoiding the MSC regulations. A payroll provider is a company that specialises in processing payroll. Many legitimate umbrella firms unquestionably give a beneficial and satisfactory service. However, the MSC Act may catch many ‘umbrella’ organisations that provide broader accounting or company services to contractors. For example, Churchill Knight is described as an “accountancy firm” that provides both umbrella and business services.
Furthermore, several accounting firms employ a single trading name for all of their services. To make matters worse, if a firm has been verified as tax compliant, such as through certification, agencies and hirers who are enticed to use it may unintentionally be locked in a tax burden that no one wants.
What should agencies and employers do?
First and foremost, HMRC recommends that anyone working under a tax avoidance scheme to STOP working as soon as possible, to prevent being hit with large tax charges. Therefore, if you believe that your contractors are working under such a scheme, urgently inform them.
We would encourage the following in the face of this tax threat:
- Familiarise yourself with the MSC legislation and how it operates
- Be wary of services given by group accounting firms with several company offers, especially those that use the same trading name for multiple organisations
- Perform your own due diligence checks, and if you’re not sure what to do, hire an independent expert to carry out umbrella compliance checks
- Use your own protection contract
- Recognise that working with compliant umbrella firms is a good idea
HMRC’s Tax Avoidance – Don’t Get Caught Out campaign, which aims to safeguard contractors against umbrella systems that allow and encourage tax avoidance, includes naming tax avoidance advocates. They hope that by naming the scams, contractors will avoid or abandon them if they are already participating. The information on this page will be updated regularly.
An interactive risk checker and payslip instructions are among the other resources given by HMRC to assist contractors.
For more information, please visit Tax avoidance – don’t get caught out