Multinational law firm Pinsent Masons say the number of tax tribunal cases waiting to be heard has increased more than sevenfold compared to the same quarter last year – from 1,200 in at the end of June 2021, to 10,000 in at the end of June 2022. Umbrella companies appear to be the reason behind this alarming figure.
HMRC have said that a key reason the tax tribunal backlog has ballooned so quickly is the large number of cases it is bringing against ‘umbrella companies’ it believes have underpaid VAT. HMRC is undertaking a significant campaign of compliance work against umbrella companies, as it believes it has identified high levels of VAT avoidance by umbrella companies on contractors’ earnings.
The tax authority says many umbrella companies have wrongly claimed their contractor’s earnings are VAT-free. HMRC hopes to be able to clear the backlog quickly, as a small number of cases will be brought forward as a test and the results will be applied to all the other cases.
“With a large number of umbrella companies suspected of VAT avoidance, the tax tribunal backlog has grown massively in a very short time,” said Pinsent Masons Partner Steven Porter. “Contractors looking to sign up with an umbrella company should be aware that it is likely the umbrella company will be required to pay VAT. HMRC will view any claims to the contrary with suspicion.
“HMRC and the tribunal are aiming to clear the backlog of tribunal cases quickly – HMRC are confident that they will win and move on to collecting the VAT it believes it is owed,” Porter added. “HMRC sees the tax affairs of contractors as an area where it is missing out on a lot of unpaid tax. Umbrella companies are firmly in its crosshairs – they need to be taking specialist advice if they are in any doubt over whether they are tax-compliant.”
