HMRC must demonstrate commitment to umbrella company regulation, experts say

The latest government consultation on non-compliance in the umbrella company market is a prime opportunity for HMRC to demonstrate its commitment to stamping out tax avoidance in the economy, industry participants have argued.

The reaction comes as the tax authority revealed in its annual report and accounts for the 2022/23 financial year that it had invested £451m in addressing “specific areas of tax evasion, avoidance and non-compliance”, equating to just 6.5% of its £6.8bn annual budget.

The consultation, Tackling non-compliance in the umbrella company market, was launched in June 2023 in an attempt to seek industry views on regulating umbrella companies. It will close next week on 29^th August.

According to Dave Chaplin, CEO of IR35 compliance firm IR35 shield, the consultation’s closure acts as an opportunity for HMRC to defy the damning statistics revealed in its annual report and demonstrate its commitments to clamping down on tax avoidance.

“It’s critical that HMRC finally listens to the feedback and acts, because there is an urgent need for tax authorities to prioritise prevention and timeliness when addressing tax avoidance schemes, as they are on the rise.”

HMRC estimates that around £400m in tax was lost in 2020/21 due to tax avoidance schemes, with a further £800m being lost due to other forms of avoidance behaviour.

Crawford Temple, CEO of payment intermediary assessor Professional Passport, says that with tax avoidance “at an all time high”, he is “surprised” to hear that HMRC spent even 6.5% of its budget on tackling avoidance.

“HMRC’s activity across all aspects of compliance in the sector is practically non-existent. HMRC has all the data it needs to identify the perpetrators of these schemes and it must tap into that information quicker and be more proactive in its effort to find the architects of the dodgy schemes and close them down.”

Temple adds that “visible enforcement is key” as he looks ahead to the close of the government’s consultation on 29^th August.

Similarly, Chaplin argues that “prevention and timeliness” must be prioritised when assessing tax avoidance schemes, suggesting the reconciliation of recruitment agency data against individual tax records as a method of automating the detection of non-compliance.

“This seems a straightforward, cost-effective solution staring HMRC in the face for years,” he says. “We must ask why such real-time preventative measures have stalled while tax avoidance persists.”

HMRC spend a ‘drop in the ocean’

As part of its Spring Budget in March 2023, the UK government announced a range of plans to clamp down on the perpetrators of tax avoidance schemes. This included an extra £47.2m to improve HMRC’s ability to collect tax debts and better distinguish between taxpayers who can afford to settle their tax debts but choose not to, from those who are temporarily unable to pay.

As part of this initiative, a range of plans to introduce harsher treatments – such as longer prison terms – for fraudsters were announced.

The tax office has also named 27 promoters and 5 directors of tax avoidance schemes, alongside details of the 31 schemes they were promoting. Thirteen ‘Stop Notices’ were also issued, which require promoters to stop selling or promoting a scheme.

But the efforts were described as a “drop in the ocean” by Julia Kermode, CEO of umbrella company compliance specialist, PayePass.

“HMRC’s accounts show that more needs to be invested in putting a stop to tax avoidance schemes once and for all. Tax avoidance schemes result in billions slipping through HMRC’s fingers, so 6% of nearly £7bn worth of spend raises questions over how seriously the government is taking this issue.”

Kermode also described an uptick tax avoidance investment as a “no-brainer”, arguing that it would invariably generate huge returns for the economy while also preventing “devastation to thousands of workers”.

Chaplin also levelled criticism at the government’s Spring Budget measures, branding the tougher punishments for tax avoiders as merely a minor amendment to a pre-existing measure.

“They could already jail people for fraud, so this is just an announcement of things that are already in place. This is just a classic thing – a bit like the government saying they’re going to be tough on crime.”

A more sensible solution, Chaplin argued, would be an automation-led approach to detect fraudulent behaviour at source – such as in cases of salary skimming.

“This is entirely doable because the authorities already have the data and they’ve been collecting it for years.

“The question is, why do we get all this useless rhetoric and threats which don’t work, when they could just simply build detection systems to find out in real time if money is not going where it should?”