HMRC has “real-time data” on tax avoidance and non-compliant umbrella companies. Why hasn’t the umbrella industry been cleaned up sooner?
Dave Chaplin, CEO of Contractor Calculator, shares his concerns about HMRC not using the data it has at its disposal to shut down tax avoidance schemes. Plus he answers Freelance Informer reader questions about the pending regulation of the umbrella industry to take place in April
FI reader questions have been emerging following an ongoing government consultation of the umbrella industry. Most recently, following the publication of a diagram that claims to show how money could go astray and not in the hands of umbrella company contractors or HMRC, but rather the pockets of non-compliant umbrella companies.
For many years, Chaplin and others serving the contractor and recruitment sector have been crying out for HMRC to ‘hook up the data pipes’ they already have [about the flow of money between hiring companies, umbrella companies, recruitment agencies and umbrella company contractors], to detect non-compliance in real-time.
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Those “pipes and data” are shown in the following diagram:
“HMRC can take the Employment Intermediaries Reporting (EIR), the Real Time Information (RTI’s) from the umbrellas, and compare it with the tax account for each of the workers. Only HMRC has all this information,” says Chaplin in a LinkedIn post.
With this information, a simple reconciliation could be done, he says, in real-time to detect whether money has “gone astray.”
If the agency has been truthful (e.g. not fraudulent), and the EIR is correct, Chaplin says then the “taxpayer account should list the name of the umbrella and taxes paid should be about right – certainly within a detectable range.”
HMRC has had this information since EIR came on the scene in 2005. Did nothing with it. All those people caught in loan schemes, since then, could have been prevented.
Dave Chaplin, CEO Contractor Calculator
Mini-umbrellas and the bait-and-switch
“If mini-umbrellas are used, this is where an umbrella does a bait-and-switch, and the EIR won’t match the taxpayer’s tax account.,” says Chaplin.
Chaplin says, “Instead of waiting 2.5 years to put firms on a naughty step, HMRC can step in, and start closing it down.”
He continues, “Guess what? HMRC has had this information since EIR came on the scene in 2005 (was it?). Did nothing with it. All those people caught in loan schemes, since then, could have been prevented.
“But, as HMRC say, apparently spotting tax avoidance is easy. The evidence does not support that, because they haven’t. Look how many are on their naughty list, operating for years, whilst they had the data.”
Freelance Informer Q&A with Dave Chaplin
Q: So, under no terms should the umbrella company worker be paying for umbrella company margins?
A: Paying the umbrella margin out of salary would be an unlawful deduction. The umbrella fee comes out of the non-statutory “assignment rate”, which isn’t the contractor’s earnings.
Q: Effectively umbrella workers are no better off or worse than any other PAYE taxpayer?
A: Depends on how you look at it. Umbrella workers are effectively picking up both sets of NICs, because the rate they think they are getting, magically turns into a non-statutory “assignment rate”, which includes the taxes paid by the employer. As the umbrella consultation pointed out multiple times, the invention of the assignment rate is causing considerable confusion.
Q: Essentially, umbrella workers are classified and taxed as highly skilled temp workers who will get benefits such as sick and holiday pay. Is this correct to assume?
A: Not really. The magical “assignment rate” is used to fund everything. It’s like promising to be bought a bunch of flowers, but you have to pay for them.
Q: What powers do they have to negotiate their project or day rate? The same as a self-employed person or is this strictly determined by the end client?
A: Everyone has the power to quote a rate that they would be happy to work for.
Q: But umbrella workers hold all the risk as a self-employed person when their contract on a project finishes?
A: Umbrella workers are stood down as soon as the project ends. Umbrella workers work on a project-by-project basis just like contractors.
Q: They also hold the risk if their employer/umbrella has not paid enough tax to HMRC? Would they hold the same risk if they were a PAYE employee at any other company other than an umbrella?
A: Umbrellas should pay the tax as an employer. If disguised remuneration schemes are used by a non-compliant umbrella, the tax risk can get passed to the worker, who becomes a victim and may become liable to pay the unpaid tax when HMRC discovers it. The proposed new rules will change that, so the agency and their directors are liable for the misdeeds of the umbrella – which will result in agencies no longer being able to turn a blind eye.
What is the point in umbrellas – they seem to me to be payroll bureaux or should be.
Compliance could be made a lot simpler but saying that agencies have to do the payroll themselves or subcontract it.
It is not necessary to add in yet another unnecessary layer of obfuscation and expense, as far as I can see.
Please correct me if I’m wrong.