BBC Radio 4’s “Money Box”[1] programme has investigated unscrupulous ‘umbrella companies’ targeting those retired nurses and other NHS staff returning to work to assist in the response to the Covid-19 pandemic, as well as new hires for the ‘track and trace’ system. I was asked to respond to questions from the presenter, Paul Lewis, about the tax consequences, for the individual workers, of the actions being taken by such umbrella companies.
Given the impermanent nature of employments of this kind, these individuals will normally be required to secure their engagement through an agency. For an agency worker, the agency or its intermediary is normally responsible for payment of the remuneration earned after first deducting tax and NICs under PAYE.
So-called umbrella companies, interposed between the agency and the individual, can play a useful role in those cases in which an individual may expect to enter into multiple successive engagements and wants to offload responsibility for the paperwork and tax compliance associated with such multiple engagements. However, some umbrella companies are promoting their services on the basis of being able to secure that the individual receives a higher amount of net earnings by structuring payments to the individual as if part only is a payment of remuneration, subject to PAYE, the balance being paid as either an “investment payment” (i.e. the umbrella company supposedly making an investment in the individual) or an “advance on a future bonus” and (so it is claimed) therefore being free of tax.
As the programme made clear, this is a form of abusive tax avoidance. Agency workers are deemed to be employees of the agency (s44 ITEPA 2003) and are liable to tax and NICs under PAYE on the whole of the remuneration they earn including “every form of payment, profit or benefit” (s47). It is not sufficient, to avoid tax, simply to describe payments of remuneration as something else. To do so poses serious financial risk for both the individual worker and the agency involved. If the intermediate umbrella company fails to deduct and account for tax and employee’s NICs when making such payments, HMRC will look to recover the tax, with penalties and interest, initially from the agency (as the intermediary payee is invariably offshore) or, if it remains unpaid within 30 days of a Reg 80 determination being made on the agency, from the individual on the basis that it is a payment of ‘disguised remuneration’ (the umbrella company being a ‘relevant third person’).
It was said, by the so-called brokers marketing the services of such umbrella companies, that the arrangements made had been confirmed by counsel to be legal. If that is correct, such opinions are simply wrong or (as has been found to be the case in the past) do not in fact state what they are purported to assert.
It goes without saying that individuals and agencies should avoid entering into such arrangements. When what is offered seems too good to be true, it probably is. In this case, it most certainly is.
The programme later suggested that the actions of such umbrella companies were analogous to the arrangements formerly widely used to structure remuneration in the form of loans from a trust which were not expected to be repaid. The government eventually responded to those arrangements with the 2019 ‘Loan Charge’ which has enraged campaigners as it has had a serious financial effect upon those workers who were either lured into or obliged to enter into such arrangements. However, the present actions of certain umbrella companies, in purportedly describing remuneration paid to a worker as something it is not, is very different. This is simply ‘calling black, white’. If done with the intention of cheating the Revenue, this could have serious consequences for those involved.
Perhaps the real issue here is whether HMRC has sufficient powers and resources to penalise, where appropriate, those who devise and promote or market such abusive tax avoidance arrangements, particularly if they are operating outside the UK.
HMRC does have powers to impose sanctions and civil penalties, both (i) for failure to disclose tax avoidance schemes under the DoTAS regime and, under legislation made in 2014 and 2017, (ii) if persons persist in the promotion of schemes after earlier schemes have been defeated, or they have enabled tax avoidance by devising, marketing or facilitating a tax avoidance arrangement. Under the ‘penalties for enablers’ rules, anyone who designs, markets, or otherwise enables tax avoidance may incur a penalty equal to the fees it has generated from the arrangement.
The problem is that, if the promoter is an offshore company, it can easily be liquidated and the individuals behind it can, all too easily, escape such sanctions.
If HMRC can identify the individuals concerned and adduce sufficient evidence of wrongdoing, they might seek to bring criminal charges for, say, conspiracy to cheat the public revenue. However, the threshold needed to secure a conviction is high, and this can prove challenging. If the individuals concerned are in countries with which the UK does not have agreements for reciprocal enforcement of criminal sanctions, such efforts may be fruitless. HMRC announced earlier this year that criminal charges had been brought against a number of individuals in the UK, although it was unclear as to what forms of evasion these arrests related. The alleged offences included “conspiracy to cheat the public revenue”, “conspiracy to evade income tax and NICs”, “fraud by abuse of position” and “conspiracy to transfer, disguise or convert criminal property”.
The question is: does HMRC have the necessary resources to root out promoters where offences have been committed?
[1] First broadcast on Saturday 6th June at 12:04 p.m and currently available on the BBC Sounds app.
David Pett, Tax Barrister 