With the deadline now passed for submissions to the Government’s consultation into the potential regulation of umbrella companies, one particular question caught our eye at IT Contracting.
Does HMRC already have the data to quickly detect if any non-compliance has taken place when a worker is paid?
Surely, if this is the case, then unscrupulous ‘umbrella’ organisations – including many of those now subject to the loan charge – would never have got off the ground in the first place.
Industry heavyweight, Dave Chaplin, has spent years investigating how the umbrella industry works – his Mathematics background enabling him to look deep into the underlying data – where others may simply skim the surface.
How money and information flows within the umbrella industry
The diagram below formed part of Chaplin’s response to the consultation on behalf of Contractor Calculator. He is one of many industry figures who has pressed HMRC to “hook up the data pipes” that are already in place.
This would allow them to detect any accidental – or more likely – deliberate non-compliance somewhere in the payment chain.
As the diagram shows, HMRC automatically receives data from agencies (Employment Intermediaries Reporting – EIR) and umbrella companies (via Real Time Information – RTI).
Surely this information can be compared to the individual tax account of any employees?
Assuming everything has been arranged properly – the agency and umbrella company are both compliant – then the EIR and record of taxes deducted from an employee’s pay – should reconcile. Subject to a small margin of error, perhaps.
All of the funds transferred to an umbrella company should either end up in the employee’s bank account, the pension pot, or paid to HMRC from the same umbrella company (after deducting their margin).
If the data doesn’t reconcile, particularly in a significant way, this may be an indicator of potential fraud – such as the possible use of so-called Mini Umbrella Companies.
Why hasn’t something been done about this already?
Currently, it can take several years before HMRC might have enough evidence to shut down a dodgy umbrella scheme. If any action is taken at all.
But, if the information already exists for HMRC to spot potential unscrupulous activity going on, why haven’t the tax authorities acted with urgency?
We asked Dave Chaplin why he thought no action had taken place when the data was available.
The simple answer is, I don’t know why they have not used the information they already have to quickly detect the issues. Maybe it’s a resourcing issue. Fortunately, they have finally indicated in the recent umbrella consultation that they will explore that data. Some might say this is too little, too late.
If a company had sight of information that led them to conclude the wrong amount of tax was being submitted on their tax returns, then the penalties issued by HMRC for deliberately ignoring it would be severe. Yet, when HMRC fails in a similar manner, nothing happens.
We asked Chaplin what he thought the umbrella industry would look like from April 2024 when much needed regulations are expected to be introduced to kick the cowboys out of the market.
My gut feel is that a phased approach will be taken. There are some easy wins that could be achieved for April 2024, but the harder legislation will require more consideration and likely come later. Although a second phase would depend on which party is in power.
The recent government consultation – tackling non-compliance in the umbrella company market – closed on 29th August.