The new IR35 Legislation has encouraged more contractors to seek work through umbrella companies. However, the rise of disguised remuneration schemes has now prompted HMRC to act.
HMRC have started issuing Tax Avoidance Warning letters directly to contractors, strongly suggesting they may be involved in a DR arrangement or scheme. However, the contractors were likely deceived into signing up as a user, believing they were signing up to a true umbrella company.
Are the Revenue using this as a skeleton argument to recover unpaid taxes? With the use of these letters, they could argue that an employee has been informed and fully made aware if any further action is required. As several contractors are being misled by these false umbrella companies, many are trying to press HMRC to chase the organisers of these schemes rather than the contractors themselves.
Crawford Temple, the CEO of Professional Passport states “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.
Three signs you’re in a non-compliant scheme
- If you are offered or receive a higher return
- If your provider has significantly higher fees, but you are still taking home more money than with other providers
- If you are asked to sign contracts such as loan agreements or investment and/or annuity documents
How to identify a Tax Avoidance Warning Letter
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”
There is a clear suggestion in the letter that the liability for the DR scheme avoiding tax 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.
We would urge any contractor who receives such a letter to act as soon as possible. Either by ensuring that your arrangements are correct and compliant, or if in doubt, move provider.
At ePayMe we are a fully compliant payroll company, offering payroll and accounting services to independent contractors and recruitment agencies. You can rest assured that your payroll is in safe hands with us. Contact us to discuss your requirements further.