Umbrella workers asked to side with the taxman
Temporary workers on overarching contracts were last night advised to "consider their options now" after the taxman signalled that their provider may already be under scrutiny.
Those options may include reconsidering their umbrella company if it abuses the tax concession that such contracts allow, or exploring set-up as a limited company, the experts said.
The only option for workers, however, that Revenue & Customs cited was to tell it that their umbrella company's dispensation may be invalid/abused or that its contracts are a sham.
Hinting it knew asking workers to 'shop' their employers was a tall order, not least as both parties benefited from paying less tax, HMRC said workers' disclosures were at their own risk.
And alluding to the prospect of unhappy employers, officials reminded that an emailed disclosure could be intercepted and "read by people other than those it was intended for."
But in its bid to close schemes that convert a portion of workers' pay into tax-free expenses, potentially when no expense has incurred, HMRC wants employers to do their bit as well.
In Revenue and Customs Brief 50/09, employers and other businesses in the temporary labour supply chain were invited to declare the identities of suspected tax flouts.
This is the first time that HMRC has reached out to end-users since it put dispensations, overarching contracts, salary sacrifice schemes and audit trails in its crosshairs in early 2008.
Although such contracts and schemes can be legal, the Revenue said it found numerous cases since July where end-users have ducked their tax and national insurance obligations.
However, enlisting workers, businesses, and businesses in the supply chain to help it stamp out non-compliance, which extends to the minimum wage legislation, is still not sufficient.
Implying as much, HMRC said other state authorities and bodies, including the Department for Business Innovation & Skills, had now accepted its invitation to catch non-compliant firms.
In addition, tax officials are also working with temporary workers' end-users to "raise awareness" of the consequences of sourcing temps from non-compliant providers.
Partly, it is this lunge for external help from HMRC, towards workers, employers and public bodies, which has got experts thinking that the taxman's own resources are not up to the task.
Kate Cottrell, of contractor advisory Bauer & Cottrell, said: "The brief suggests that since HMRC began its compliance work in July 2008 things are actually worse than it suspected.
"Although HMRC has announced standard scale rates for subsistence and beefed up its powers around dispensations, they have the very big problem of enforcement, in particular [with] those providers who have dispensations in place with some four years to run.
"Perhaps the biggest problem is that once they have identified breaches of the law, HMRC has nowhere to go to collect the underpayments, as neither agencies or umbrellas hold any funds."
Ms Cottrell, a former Inland Revenue tax inspector, said evidence that HMRC gathers, particularly from workers and employers, as a result of its appeals will be passed to ministers.
HMRC said: "Ministers will then be able to consider the extent to which compliance action is able to address the undesirable effects of these schemes and whether further measures are required."
Given the bigger-than-expected scale of the avoidance problem, and with some calls for new legislation, this language suggests the greater focus on compliance may not be enough.
"I would not be surprised to see the withdrawal of dispensations and mandatory transfer to scale rates" for all umbrella companies, Ms Cottrell warned.
Alongside the transfer of debt provisions for agencies, umbrellas and end client businesses, she said such measures were all conceivable to take effect from April 2010.
In the meantime, and to incentivise owning up, HMRC told employers they risk damaging their reputation and business if it thinks they are not meeting all legal obligations and takes action.
In a leaflet recently issued to employers who use external staff, HMRC made clear that the onus is on them - the end-user - to carry out appropriate checks on their labour supplier.
"HMRC has identified increasing problems with fraud and unpaid taxes through the use of labour providers," the leaflet, Advice on Labour Providers - Due Diligence, states.
Not making "appropriate checks may be evidence that you knew or should have known of the fraud," it adds, yet "HMRC is unable to tell you exactly what checks you should undertake."
Although the biggest tax saving from, unlawfully, putting staff on overarching contracts to join separate work engagements goes to employers, workers should also make some checks.
"Contractors should consider their options now rather than wait, not least because HMRC could already be investigating their provider and they have the power not only to withdraw the dispensation now but also retrospectively," Bauer & Cottrell (B&C) said.
For travel expenses to be allowable for tax purposes, workers must work at a succession of workplaces (subject to restrictions), or there must be a reasonable assumption that this will happen.
Where the worker has a series of contracts through an agency, HMRC will look on each contract as being separate employment, so the overarching contract must offer employment beyond the current contract with the end user.
"This is the main element of the contract that must be included so that there is always an expectation of further work, hence travelling [expenses] being allowable," added ex-Revenue inspector Bob.
"Having said that, HMRC will scratch beneath the surface to see whether this is what will actually happen, or is likely to happen in practice."
HMRC can argue that, based on a worker's history, it is unlikely the person had any intention to work beyond the current contract, thereby making a nonsense of the 'overarching' element.
"So the element of further work not only has to be in the contract but also the intention of the worker," Mr Jones said. "The latter may be difficult to prove in the first year, but if their history shows a pattern of 'seasonal-only' working then it may be difficult to argue against."
According to the HMRC brief, those arguments are already being made, as its officials have identified seven areas of concern "that are the subject of more detailed, ongoing investigation."
They include: potentially ineffective overarching contracts; invalid, wrongly applied or non-compliant dispensations; tax-free expenses payments without that level of expenses; and ineffective management processes.
Ms Cottrell reflected. "Come April next year, I expect the only differences there will be between compliant umbrella companies is the level of their fees and the level of customer service, which is of course how it should be.
Mr Jones said compliant umbrellas would welcome news of HMRC's latest approach to the temporary labour marketplace.
Martin Hesketh, managing director of Brookson, testified: "We fully support HMRC's efforts to create clear and fair rules for professional contractors that drive industry standards on compliance.
"The benefits of working via a compliant umbrella provider should not be put at risk by the abuse of current legislation.
"The announcement is a step in the right direction and we welcome further moves by HMRC to create a level playing field for those companies that have ensured compliance for contractors."
It is only non-compliant umbrellas, Mr Jones said, that will be less pleased, for now being expected to make good all tax, NICs, plus interest, together with "all conceivable penalties that HMRC can charge."