How Easyway Umbrella and IPS Progression both failed to beat the taxman in court

More than once now, HMRC’s publication of tax avoidance schemes is something I have written about for ContractorUK, and how a company may find itself on the ‘blacklist,’ but writes Tom Wallace, director of tax investigations at WTT Group, what if the ‘umbrella company’ thinks HMRC is wrong? 

And what is the HMRC penalty if an ‘umbrella’ does not disclose its arrangements under the Disclosure of Tax Avoidance Scheme (DOTAS) rules?  

Well, two recent cases give us an insight into both these slightly atypical situations.

The Easyway case

In July 2023, HMRC placed Easyway Umbrella Ltd on its published list of tax avoidance schemes under the powers given to it under Section 86 Finance Act 2022.  The tax authority believed that it was a disguised remuneration tax avoidance scheme which paid part of the contractor’s wage in untaxed loans or similar. 

When HMRC intends to add a scheme to the ‘blacklist’ under Section 86, they must notify the company that they intend to do so with the reasons why, and give 30 days to make representations. 

What does ‘representation’ mean?

It is important to note that a ‘representation’ is not an appeal. Rather, it’s an opportunity to provide HMRC with an explanation as to why the reasons given for naming them are incorrect or misleading. Should HMRC not agree, then the only way to challenge the decision is through Judicial Review, which is what Easyway did.

The first step in any judicial review is to apply for permission, initially reviewed by a judge on the papers (which is routinely rejected), before renewing the application in person in open court. And therefore last December, Easyway’s application was heard in The Administrative Court in front of Mr Justice Kerr.

A graphic naming and shaming

Judge Kerr’s ruling states: "The challenge is what the claimant [Easyway] graphically calls a decision by the defendant [HMRC]: ‘to name and shame Easyway in accordance with section 86 of the Finance Act 2022.'"

Easyway presented a number of grounds which they considered were arguable, which the judge disagreed. This included HMRC’s reasons for publishing being inadequate and unlawful; the decision to publish being irrational, and that publishing the notice unlawfully and disproportionately interfered with the company’s rights under Article 1 Protocol 1 of the ECHR. 

The one ground Easyway put forward which was arguable…

The judge considered that none of these grounds should succeed and refused permission in respect of all of them. The one ground that was considered “arguable” was the fact that Easyway claimed that they had not received the letter from HMRC notifying them of the decision to publish their details. 

However, under the Senior Courts Act 1981, the judge needed to consider whether the outcome would have been different if the decision letter had been received. The judge’s view was that even if it was received, the representations would have been the same as the arguments raised in the judicial review application which he considered not arguable, and therefore would not have led to a different outcome -- in that HMRC would still have published the details.

On that basis, the whole of the permission application by Easyway was refused.

And, at the time of writing (April 2024), Easyway Umbrella Ltd still appears on the blacklist of avoidance schemes which HMRC says contractors should withdraw from or not use.

The case of IPS Progression

Separately, there is HMRC v IPS Progression Ltd -- a slightly different case in that HMRC considered that the arrangements operated by IPS should have been notified to them under the DOTAS rules. 

IPS was a “deferred bonus” scheme, whereby contractors received a payment which was described as a “loan” that would be repaid with a future share of a bonus pot.  However, no bonuses were ever paid and the loans remained outstanding.  HMRC considered that such loans are really earnings and therefore taxable.

To-ing and fro-ing

During HMRC’s enquiries into the scheme, they raised the point that they considered the scheme to be notifiable under DOTAS, and while the company initially resisted, after some to-ing and fro-ing, IPS did eventually notify HMRC on form AAG1.

Ultimately however, this was six years after the deadline for doing so, with a maximum penalty of £600 for every day they did not comply. This case was therefore solely for the tribunal to determine the size of the penalty due.

‘Protective basis’

The tribunal, having satisfied itself that the arrangements were notifiable under DOTAS and that IPS was a promotor for the purposes of the legislation, agreed that a HMRC penalty was due and that there was no ‘reasonable excuse’ for failing to notify.  However, it ruled that the disclosure of the scheme happened slightly earlier than HMRC had argued, as an initial submission of the AAG1 made on a “protective basis” which HMRC rejected, was indeed valid as the legislation does not preclude it being made in such terms.

The tribunal therefore considered the maximum penalty it could impose to be £1,318,200 and, following mitigation, determined a final assessment of £900,000.

However, as we have seen before, where the company has ceased to trade and no longer has funds in the business, there is a big difference between assessing a penalty and collecting it!

Final takeaways for contractors of Easyway Umbrella and IPS Progression both losing in court

The marketing of schemes like these usually carries assurances from the sellers that they are not tax avoidance, and indeed even when challenged by HMRC explanations are quickly offered that HMRC have somehow misunderstood the arrangements or are just plain wrong. 

These two cases show that these assurances are transparent to the courts, who will take a realistic and purposeful interpretation of the facts in reaching its conclusion. 

Simply put contractors -- if anyone is telling you that you can be paid by an umbrella any other way than everything you receive being taxed under the Pay As You Earn system, get your running shoes on, and fast.


Profile picture for user Thomas Wallace

Written by Thomas Wallace

Tom is a former HMRC Senior Inspector of Taxes who has worked in and led teams in all taxpayer segments dealing with large multinationals to small businesses.  Tom was appointed Director of Tax Investigations at WTT Consulting in 2020, where he is currently responsible for developing strategies for dealing with HMRC enquiries and client litigation.
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