New HMRC avoidance letters: how contractors with employers should respond
It was warned about back in December of last year, but the proliferation of Disguised Remuneration schemes due to the new IR35 off-payroll rules is only now prompting HMRC into action, writes Crawford Temple, CEO of Professional Passport.
We're pressing HMRC but HMRC is pressing contractors not promoters
In fact, while we are continuing to press the Revenue to chase the promoters of these schemes rather than the contractors themselves (who are being unwittingly duped into becoming ‘users’ not ‘umbrella employees’ like they thought they were), HMRC is now pressing the contractors. Specifically, the department is issuing Tax Avoidance Warning letters to these contractors, with the strong suggestion that they may be involved in a DR arrangement or a scheme.
The taxman's argument, potentially in the making…
Before I explore these letters and offer guidance if you’re a recipient, our concern in HMRC writing to contractors while seemingly to do very little against the parties behind the schemes, is that the tax authority has ‘form’ in this area. The Revenue could be assembling a skeleton argument to recover unpaid taxes from an employee on the basis that, thanks to this new batch of letters, they were informed, warned and made aware. So, not dissimilar to the loan charge fiasco, HMRC will put the onus on contractors to recognise a scheme and take the appropriate action. And if contractors don’t? Well, we could unfortunately see history repeat itself.
First and foremost, it should be emphasised that many contractors are falling foul of these new IR35 reform-inspired schemes, often masquerading as umbrella companies, and they could suffer considerable financial hardship as a result.
The absence of enforcement is astounding
So HMRC could, and should be, taking a robust stance against these schemes and stepping up its enforcement activity to shut them down. The lack of HMRC enforcement simply serves to allow non-compliant operators to thrive.
Many contractors we speak to don’t always realise just how much information HMRC holds that would make it easy for tax officials to identify ‘dodgy’ schemes. The issue that comes up, time and time again and remains unresolved today and unanswered by HMRC, is why the taxman is not more proactive in his approach. And why he is not working flat out to close such schemes down faster?!
What he is doing is writing letters to contractors.
How to identify an HMRC Avoidance Warning Letter
So what do these tax avoidance warning letters say, and how should contractors respond?
Typically, the HMRC letter states:
“Your employer should make sure the right amounts of tax and NICs are paid to us for your earnings. However, in some circumstances you may end up being responsible in law for paying them”.
The clear suggestion in the HMRC letter is that the liability could rest with the worker.
The letter has therefore been designed by HMRC to alarm the recipient into action, ideally with the outcome of the worker leaving the scheme, despite being signed up to it.
Protect your position, before the ‘aware’ argument advances
Contractors -- it should go without saying that if you are engaged in a scheme then you should exit it as quickly as possible to protect your position. Leaving the scheme could also provide you with a useful defence should our fears materialise and as we predict, HMRC seeks to recover any tax shortfalls from you -- the contractor.
Now for a bit of tax background, so contractors can understand their position better.
Within UK tax law, an individual is responsible for their own tax affairs. However, this principle is overridden when that individual is employed by a UK employer who operates PAYE. HMRC can challenge this principle if it can prove that the employee was ‘aware’ of the arrangements.
The avoidance alert letters being sent by HMRC beg the question we effectively asked at this piece’s outset. Is HMRC using the letters to shore up an argument to recover unpaid taxes from an employee, by claiming that they have been alerted and therefore were ‘aware’?
To be on the safe side, I would urge any contractor who receives such a letter to act and protect their position, either by satisfying yourself that the arrangements are correct or, if in any doubt, move provider.
Nonsensical, disconcerting and disappointing
It’s well-known that the vast majority of DR schemes fail to apply PAYE correctly on worker earnings. The schemes also attach a wide array of nonsensical labels to the untaxed amounts. Such behaviour should ring alarm bells to HMRC, which should be using its powers (not for letter-writing) to recover the underpayment of tax from the employer, rather than the worker.
Contractors might like to know that HMRC has extended powers to ask for ‘securities’ to protect a position where it believes there is risk of underpayment of PAYE or VAT by a company. This means that HMRC can ask a company to lodge an amount of money with them to cover any risk of shortfall, and if the company does not respond to such a request, then it would prevent a company from continuing to trade.
So if HMRC wants to write letters, is the department writing to the companies behind these schemes to request securities to protect the position? Remember, HMRC holds the crucial information that has prompted it to take the necessary steps and issue a letter to an employee so surely that information should likewise prompt HMRC to take action against the employer? Why this is not happening is extremely disconcerting and disappointing.
In addition, where a company fails to meet its liabilities, HMRC has the powers to transfer a director’s company debts as a personal liability. I suggest that this step too ought to be taken by HMRC against the schemes in question, before any action is carried out to seek recovery from an individual taxpayer.
Don't ignore these HMRC letters
But as it is the individuals who are on the receiving end of HMRC, we recommended that contractors and other recipients DO NOT IGNORE these avoidance warning letters.
If you want an independent take on your circumstances, use our Report a Concern page to outline your query or issue. Then attach relevant documents like copies of payslips and the communications you have received from HMRC and your provider.
But so as not to disappoint you our stance is simple. If you’re in any doubt about your provider, don’t hesitate to leave. Protecting your position should be your priority. And remember, all umbrella companies should provide very similar returns, as they all operate under the same tax rules.
Three tell-tale signs you’re in a scheme (and should leave)
So if you are offered, or receive, higher return, then it is likely that you are signed up to a dodgy scheme and that the PAYE is not being paid correctly.
Providers also charge very similar fees, so if your provider has significantly higher fees and you are still taking home more money than with other providers, it is highly likely that you are embroiled in a non-compliant arrangement or scheme.
Thirdly, if you are asked to sign contracts such as loan agreements or investment and/or annuity documents, it is likely that PAYE is not being applied correctly.
Even if you’re a contractor reading this who has not received one of HMRC’s Tax Avoidance Warning letters, pay heed. For example, if you are weighing up your options about umbrella company working and considering becoming a brolly employee, ask key questions to ensure you finally settle on a compliant umbrella.
Always be both au fait with and ready to respond to red flags and know what you want to avoid when assessing a prospective provider’s claims, promises and arrangements. As mundane as the nitty gritty can be, it is this detail that will determine if it is a bonafide and genuine PAYE umbrella company or the to-be-avoided ‘have I got a good idea for you’-type scheme. Meanwhile, if you are already working through a compliant umbrella, then you shouldn’t be too concerned about HMRC’s Tax Avoidance Warning letters, despite tax officials trying to put the heebie-jeebies up anyone who reads them!