Jeremy Hunt’s first budget met expectations. ‘Dammed by faint praise’ fits the bill when best trying to articulate the frustration felt at yet another in a long list of missed opportunities.
For those working in compliance and contingent employment, across the contracting sector, the failure is stark and can be charged on two counts.
First up, it provides nothing to lower the risks of tax avoidance or improve enforcement.
Looking at the wider impact of this failing, the UK has, over the past number of months, placed a major national infrastructure project on hold, because of budget concerns. Regional and local authorities have faced years of budget cuts. Key workers are on strike over pay and conditions, after a decade or more of underfunding – all, we’re told, because of shortfalls in the public purse. It’s here that the unwillingness to address systemic abuse of the tax system is particularly unforgivable.
Secondly, it fails to protect some 600,000 agency workers, contractors, freelancers.
- Within the UK there are approximately 40,000 agencies, and 700 umbrella companies.
- Collectively these entities pay over £22BN in wages and collect £10BN in tax and NIC’s.
Many working under these terms of employment find themselves, without their knowledge, paying an incorrect amount of tax, as a direct result of unscrupulous behaviour from agencies and umbrella companies.
Let’s be clear; this should be criminal.
And it’s here the Chancellor has also missed a massive opportunity to top up the treasury coffer.
- How? By addressing long standing issues from a sector where taxes are literally gushing out of the system
- Why? Because it is, and remains, unregulated.
Responsibility and accountability
The Government has a duty of care to agency workers to ensure they receive the correct amount of pay for work done and that they receive the statutory employment rights afforded to them under the law. It is the job of HMRC to collect all taxes due through PAYE and from the companies’ providing services in this sector. Adopting a much stronger approach to enforcement and compliance will stop this gratuitous loss of taxpayer’s money.
What’s the current state of play?
Changes to IR35 called the ‘Off payroll working’ legislation introduced into the public sector in 2017 and the private sector in 2021, were introduced by HMRC to reduce tax avoidance in situations where an individual (a contractor) provided services to an end-client through a personal service company (PSC) or intermediary. The changes made the end client liable for determining the tax status of contractors they engaged. This has exacerbated issues of non-compliance, as many clients became risk adverse or did not have the operational infrastructure or desire to conduct the assessments and feared getting it wrong and being issued penalties of up to 200%. They instead opted to tell their agencies to place these workers as inside IR35 onto PAYE which led to an increase in umbrella employment.
- £400M a year is lost through the facilitation of tax avoidance and evasion which is already a criminal offence, whereas tax avoidance is where the sole purpose of a scheme is to exploit the legal loopholes to pay less tax and not applying the legislation as it was intended.
Most people are aware that when companies are hiring, they use agencies to source the staff and in turn employ the temporary workers onto their own payroll. However, in the last 20 years there has been a proliferation of umbrella companies to which agencies outsource the employment and payroll of their workers. Doing so reduces their fixed costs and removes the obligations and liabilities of being an employer. Umbrella done compliantly offers huge benefits to contingent workers working in multiple short term assignments.
Umbrella companies are essentially third-party employers and payroll companies. Frustratingly, there is currently no statutory definition of an umbrella company. This means the term is often used to describe a variety of different engagements and activities, not all of them compliant!
Agencies do not directly pay for the umbrella company services in the way a typical supplier would be paid by a client, and in many cases an agency will demand inducements to allow an umbrella company to be added to the preferred supplier list.
- There is a cohort of compliant umbrella companies, which believe this practice actively encourages aggressive non-compliant behaviours.
- HMRC fails to address this issue, largely because they have no comprehension of the level of inducements being offered, or on which the tax due is not being declared.
What is HMRC doing?
Regrettably, HMRC’s record of identifying and stopping tax avoidance schemes and promoters has been woeful and sluggish for years. Whilst they are now taking more action – including the ‘naming and shaming’ of tax avoidance companies, listed on the HMRC website – the challenge is that it is already out of date when published. Companies have already ceased trading, so there is no real impact or benefit to the tax man.
Time for a change of tack
A complete change of approach is needed, including embracing industry expertise. Investigating smaller promoters as well as the large, taking action faster, increased enforcement activity within agencies, accountants and tax advisors helping to drive workers to these schemes by acting as enablers.
Without meaningful action, agency workers will continue to be exploited and genuine compliant businesses discouraged from operating or worse, they will cease to exist because they cannot compete.
Janet De-Havilland, Chief Executive of global compliance and employment consulting firm Pendragon Consultancy said ‘there is a plethora of information on the internet, in news publications, industry journals about the scourge of tax avoidance rampaging through the contracting and temping sectors unabated. She was extremely disappointed by the total lack of acknowledgement and the ‘failure to address’ these important issues in this budget with no attempt to provide a remedy or reform of these practices and once again no ‘employment bill’.
Specialist firm, Pendragon, industry trade bodies FCSA, APSCO, REC, JobsAware, and others, have regular interactions and dialog with HMRC and BEIS regarding the harm being caused and the erosion of worker rights. In the absence of regulation, they aim to provide a collaborative approach to non-compliance in the interim.