An agency compliance veteran reveals where Labour could clean up the supply of contract labour, with a little help from the taxman.
My days as a finance manager for specialist contractor recruitment services groups might be behind me, but right now HMRC is advising agencies to include a clause in their contract with umbrella companies, with the effect that the umbrellas’ directors indemnify the agency against tax liabilities if PAYE is found not to have been carried out correctly on contractors’ total taxable pay.
That tells me tax avoidance schemes from ‘umbrella companies’ is still very much a thing, and so it’s also very much a thing contractors need to be aware of every time they engage a new brolly, writes Alan Lowdell, a former finance manager for Gattaca plc.
The UK tax avoidance industry appears to be doing a brisk business
Of course, this director indemnity guidance (at 2mins 02seconds in an official video uploaded by HMRC just a few weeks ago) is not the only resource from the taxman effectively telling us that the avoidance industry is in rude health.
In April 2022, HMRC started publishing the names and details of tax avoidance schemes, promoters, enablers and suppliers.
The Revenue stated then, as it does now, that it is not a complete list of all tax avoidance schemes currently being marketed. But is it not a complete list of all promoters, enablers and suppliers either.
‘Named and shamed’ — for 12 months, and not a day longer
Where a Scheme Reference Number (SRN) has been allocated to the scheme by HMRC without notification by the promoter or other persons, the information about the promoter/other persons will be held on the list, visible here, for a maximum of 12 months.
The technical explanation is that HMRC will remove the names of the promoters/other persons in accordance with DOTAS legislative requirements, as well as details of the schemes published under these provisions.
Why does HMRC delete entries after 12 months?
Often, the schemes that are removed from the ‘blacklist’ by the time of removal have ceased being sold. Therefore, according to HMRC, removal can help keep the list focussed and relevant.
However, occasionally there will be schemes due to be removed 12 months following publication that are still live at the point of removal.
Should this happen, HMRC claims it will aim to republish the details of the scheme, including the name of the promoter, under the 2022 legislation or another of its publishing powers, prior to the scheme being taken down from public view. This would ensure that where there is a continuing risk to taxpayers (typically contractors), the details of the scheme and its promoter will remain on .gov.
Be aware, there will be circumstances where HMRC is prevented from taking this action, and if a scheme is not on the list, it does not mean it is approved by HMRC.
The rules are different under the Promoters of Tax Avoidance Schemes (POTAS) rules. Under this framework, there is no time limit for how long information about promoters can remain on the list.
What activities does an enabler of tax avoidance actually do?
For “enablers”, defined by HMRC as “any person who is responsible, to any extent, for the design, management, marketing or otherwise facilitating another person to enter into abusive tax arrangements,” information will be held on .gov for a maximum of 12 months from the date of publication.
With how serious the activities of an enabler are, and with the detrimental effect they are known to have on contractors, taxpayers at large and the Treasury coffers, that 12-month window seems illogical.
The illogical 12-month window (cont.)
And so my belief is that the legislation should be updated to amend what appears to be an oversight.
Some say maybe this illogical 12-month window is deliberately supported by HMRC, to allow it the continuation of grey areas, which they cover by making statements as above.
Ambiguity = opportunity
From what I’ve witnessed in this space for the last two decades, where the law is not black and white, it leaves room for interpretation — and therefore an open door for HMRC which they don’t seem in a hurry to close because it adds nicely to their compliance yield. Similar is the ambiguity of the umbrella company market, which isn’t regulated but still has to abide by HMRC’s and other regulations. IR35 and the off payroll working rules are likewise an open door, whereby there’s room for interpretation beyond some basic tenets.
In short, these are all complex areas, subject to HMRC’s interpretation and where ambiguity equates to opportunity for tax collectors.
With umbrellas in particular, there is an ideal opportunity for the new Labour government to pick up the considerable work which was started by the previous Conservative government and regulate the umbrella market outright. This could be achieved by provisions in the Labour government’s Employment Rights Bill, although disconcertingly, so far we have seen no consultation and time is running out.
The case for an HMRC-approved list of compliant umbrella companies
My personal recommendation is that rather than having a blacklist containing the names of the non-compliant (again in HMRC’s eyes — i.e. not tested in court), it would provide more certainty to the contractor industry, and be more straightforward, if there was a list of compliant umbrella companies, recognised by HMRC.
A list of HMRC-complaint umbrellas would be preferable to the ‘due diligence’ requirement.
This ‘due diligence’ regime which the government said on April 18th 2024 that it is minded to introduce into law for businesses that use umbrellas, indicates that agencies or end-clients who pay umbrella companies directly, will need to have audited the umbrella companies for compliance.
This would put enormous pressure on umbrella companies to host the audits for each client / agency, along with those business needing to have specialists within their operations to conduct the audits — or rely on subcontracting that work. Of course, if an agency is likely to be subject to ‘debt transfer,’ which was also an option discussed at HMRC roundtable meetings at the back end of 2023, I’m sure agencies would not want to subcontract this exercise.
HMRC has some joining up to do, as umbrella director indemnities aren’t part of its recommended due diligence
The current ‘due diligence’ guidance from HMRC for those businesses working with umbrellas is available here. And perhaps there is some joining up to do by HMRC, because the 11-strong list of actions which the guidance recommends that agencies “should” take does not make any mention of the director indemnities which the HMRC video outlined at the top of this article states that agencies should include in their contracts with brollies.
Keep in mind, all this isn’t new and perhaps some fixes lay in the past.
Quite the dataset is already with the Revenue…
HMRC have been receiving data from intermediaries since April 2015 for all workers they place with clients where they do not operate Pay As You Earn (PAYE) on the workers’ payments. This data-stream includes all payments to umbrella companies, including the workers personal details. HMRC have in its possession the details of the gross payment, if it includes expenses, and VAT. These facts and figures could all be cross-referenced to RTI from the umbrella companies and VAT returns, and I don’t see this as particularly onerous for HMRC.
Yet it would be a great support to taxpayers, the recruitment industry and compliant umbrella companies.
But my envisaged HMRC ‘compliant’ list of umbrellas which I’d advocate gets published (in addition to the blacklist we have today), could be operated in conjunction with a representative body. There are three which come immediately to mind — the Recruitment & Employment Confederation (REC), the Association of Professional Staffing Companies (APSCo), and the Freelancer & Contractor Services Association (FCSA).
The pay-as-you-go model is a plus
Separately, while it doesn’t include the ability to identify withheld payments, such as holiday pay, the change to reverting to paying holiday pay ‘as you go’ also assists workers.
For more information here see this helpful explainer from ACAS, but in short, holiday pay must now be shown separately on a payslip unlike previously, where it could be included in the rate.
There will be some end-clients, particularly those operating in unionised arrangements, where they will not support this more transparent, ‘pay as you go’ model. But the amount of due diligence subsequently required would be reduced and could be supported by having the accrued time and average 52-week hourly rate clearly included.
Penultimately, my envisaged ‘approved’ HMRC list of brollies would not be the only compliant list HMRC supports, as the tax departments already provides a list of payroll software that is recognised by HMRC. Even though, on that list of software products, HMRC has inserted a few ‘get out’ notices to cover itself!
Final reflections
When I was in my most recent post as a contractor recruitment agency finance manager with responsibility for compliance, and before that as a head of finance for another staffing business, agencies were being criticised up and down for operating their own ‘approved supplier lists,’ often by workers who typically want to use their own choice of provider.
Well, that request from contractors would be so much easier for agencies to honour if only HMRC could come forward with and draw up a compliant list of umbrella companies. For a new Labour government surely wanting to make a positive impact on the supply of labour, it seems like a no-brainer; because the opportunity is there, right now.
Recommended Contractor Accountants
- SG Accounting - Join SG and get first 3 months @ £59.50pm
- Clever Accounts - IR35 FLEX. Take on any contract you're offered
- Aardvark Accounting - Complete service just £89/month
- Integro Accounting - 6 months fixed fee accountancy service half price!