Exchequer Solutions Ltd director Mike Lowndes steps down from FCSA, following £11million unpaid tax ruling on contractor expenses

Mike Lowndes, MD of Exchequer Solutions Ltd, has quit as a board member of compliance body the Freelancer & Contractor Services Association (FCSA), ContractorUK has learnt.

Mr Lowndes resignation comes after the Chester-run umbrella company was ruled by a judge to owe what’s been described as a “mega” £11million in taxes related to contractor expenses.

Based in Warrington, Mr Lowndes voluntarily stepped down yesterday, relinquishing the FCSA role he was elected to in November 2021, seemingly for no other reason than the ruling against his umbrella.

His resignation after just six months in-post follows ContractorUK asking the FCSA about his suitability to be a board member of a compliance body, when his own umbrella company has been ruled by a court to be non-compliant.  

'FTT is mistaken in several areas'

But speaking through the association, Exchequer Solutions Ltd (ESL) said yesterday it “strongly” believes the ruling in favour of HMRC to be “mistaken in several areas.”

So ESL will appeal the First Tier Tribunal’s judgment, handed down by FTT judge Robin Vos, which, broadly, went against the umbrella in two areas.

First, that Exchequer’s “many thousands” of contractors between 2013/14 and 2016/17 were “not” on an overarching employment contract, and so should “not” have had their expenses reimbursed tax-free.

Second, and also contrary to what the umbrella argued, ESL was “not entitled to reimburse subsistence expenses on the basis of benchmark scale rates,” because the firm had “not” applied for or received a dispensation from HMRC.

'Overarching contract only part of the challenge'

Agency legislation expert Carolyn Walsh explains: “HMRC found that the part of ESL workers’ income was processed as travel costs paid free of tax and NI, and that relies on PAYE legislation; so the involvement of an overarching contract of employment was only part of the challenge.

“HMRC warned the sector in 2015 that the way umbrella companies processed expenses would change; which it did with the removal of dispensations in 2016 and the allowance of tax relief on reimbursed travel expenses only where the agency/umbrella worker is not working under supervision, direction or control.”

Boss at umbrella company CWC Solutions, former tax inspector Ms Walsh added: “The defence by ESL was that an overarching contract of employment was in place and so the rules that apply to intermediary workers did not apply to their ‘employees.’ Yet the tribunal rejected this on a number of grounds.

“For the vowed appeal, the only defence I can see would be [to argue] that the intermediary/umbrella worker was not working under supervision, direction or control of the agency or hirer. But the tribunal didn’t see necessary to consider [this] at this stage.”

'Highly technical'

FCSA chief executive Chris Bryce yesterday described the issues before the FTT as “highly technical”. But also seemingly singular.

“HMRC’s case rests almost entirely on the question of the employment contracts issued by ESL to workers at the time, and whether those contracts were overarching contracts of employment, or if each assignment should be considered as a separate employment.

“[But] there is no statutory definition of an overarching contract”, continued Mr Bryce. “[And] it is important to note that there are no allegations [against ESL], by HMRC or any other party, of any type of fraud or negligence”.

'Insufficient mutuality'

To try to break down the ‘highly technical’ case into digestible terms, ReLegal Consulting said the FTT effectively found that ESL’s overarching contract of employment had insufficient mutuality of obligations to constitute a contract of employment.

“In this case, it was the workers who benefitted from the lack of deductions and the umbrella company who will have to make good the losses to HMRC,” said ReLegal’s Rebecca Seeley Harris.

“The point was --  each individual [contractor] was going to a permanent place of work and was, therefore, not entitled to have the expenses for travel and subsistence paid with deductions.”

'Sweating umbrellas, even the accredited ones'

As a result, “more than a few umbrella companies” will now be “sweating” as they wait for their legal advisers’ verdict on their own over-arching contracts, says tax expert Thomas Wallace.

“And some of them will even be ‘accredited’ umbrella companies,” poked Mr Wallace, also formerly of the Revenue and now head of tax investigations at HMRC dispute advisory WTT Consulting.

But at accreditation and compliance body the FCSA, Mr Bryce yesterday reassured that for Exchequer Solutions, it’s “business as usual”.

However, ESL’s managing director Mike Lowndes has now handed in his notice to the FCSA relating to his board member role.

At the same time, an FCSA review of ESL’s operations is underway (the third of which, each conducted annually to check compliance with FCSA’s compliance codes), Mr Bryce said.

'In place at the time'

In March, the association came under pressure when JSA, now operating as Workwell, was accused by a contractor of withholding holiday pay running into the thousands of pounds.

An ensuing investigation by the FCSA into JSA -- one of the FCSA’s own founder members – cleared the company of breaching the codes, albeit codes “that were in place at the time”.

Since the period of the alleged holiday pay pocketing, the FCSA has strengthened its compliance codes after admitting to ContractorUK that the wording within was, potentially, “woolly.”

Also since the complaint, JSA/Workwell had its FCSA membership renewed by the FCSA and, crucially according to another umbrella company, changes of personnel did not occur.

'Stinks to high heaven of double standards'

“Today’s case of Exchequer Solutions absolutely stinks to high heaven of double-standards,” began the brolly, Orca Pay Group.

Orca’s CEO Robert Sharp explained: “The former FCSA chair, Chris James, retained his role during contractor holiday pay withholding allegations at the umbrella he was a director of -- JSA, which became Workwell.

“But we’re now told ESL director Mike Lowndes has given up his FCSA role of his own volition, possibly just because the spotlight is now on the FCSA, and definitely because a court found that his Exchequer Solutions owes 'in excess' of a mega £11million to HMRC.

“Many in in the sector will see Mr Lowndes as a scapegoat, regardless of whether the FTT’s judgment is appealed or not, and even though he apparently stepped down voluntarily.”

'Rush to judgement'

Online last night, an ex-contractor sounded sympathetic, saying – sarcastically:

“I wonder how many [of us] can [correctly] predict the outcome of the renewed membership review [FCSA is conducting into FCSA member company ESL]?!”

But a former contractor himself, Mr Bryce appealed yesterday against a “rush to judgement”.

He also pointed out that ESL first became a member of the FCSA in May 2020, so “more than three years after the period [in the FTT case]”.

Mirroring the wording used when JSA/Workwell in April 2022 had its FCSA membership renewed until March 2023, Mr Bryce also said that when ESL became a member it was, “compliant with FCSA’s codes at the time.”

'Disgraceful'

Orca’s Mr Sharp is unimpressed. “Where was the supposed gold standard audit that the FCSA do in highlighting these expenses [at ESL] if [the alleged underpayment of £11m-plus] dates back to pre-2016, when the [HMRC rules] on umbrella expenses changed?” he asked.

“Remember, the FCSA waved through JSA’s FCSA membership renewal after documents appeared to show JSA taking contractor holiday pay…and if it waves through Exchequer Solutions’ [continued] membership, then that would be disgraceful, given a court has just found [ESL] should have paid HMRC millions and millions relating to contractor expenses, but didn’t.”

A source in the umbrella payroll market is much more forgiving of ESL, however.

“From reading the judgment it looks to me like Exchequer Solutions were simply making use of the tax legislation available to them at the time. Partly for that reason, I fully expect them to pass their FCSA [membership] review.”

'Similar waters'

“The other reason, though, is because we’ve been in similar waters before,” the source said; explaining:

“Workwell were nodded through earlier this year [by the FCSA to have its FCSA membership reinstated], despite being widely suspected of having in place processes to systematically withhold holiday pay from their contractors. 

“While the results of that investigation [into Workwell] were never publicised -- even though the FCSA promised that the results would be made public, the FCSA’s charter states that their members will ‘observe the highest principles of ethics, integrity, professional conduct, and fair practice.’ Unfortunately, recent history suggests that this doesn’t apply to all members equally.”

An FCSA spokesperson said: “FCSA’s assessment process is unique in the industry, in that it is carried out by a panel of independent, expert professional services firms consisting of EY Legal, EY Tax, Saffery Champness, BDO, Brabners, and JMW Solicitors who assess compliance with FCSA’s publicly published codes in a rigorous and thorough manner.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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