The ‘How Contracting Should Work’ inquiry conducted by the Loan Charge APPG is not an easy read and points out in no uncertain terms that the Off-Payroll legislation has been a clear driver in the proliferation and use of unregulated umbrella companies and other related arrangements such as disguised remuneration schemes. A review has been called for and it is about time too. We have been calling for a proper review that looks at all the elements of contingent working which are intrinsically linked. With the lack of a single, approved model of working and in an unregulated industry like the umbrella sector it has never been more important to design clear guidance on what a compliant umbrella firm looks like so that the supply chain can use it as a reference guide.
The proliferation of disguised remuneration schemes has been driven by the incoming Off-Payroll legislation. With firms blanket banning limited company contractors, those who do not work PAYE for the hiring client are being requested to work through an umbrella firm and in some cases are being duped into signing up unwittingly to a scheme purporting to be an umbrella firm.
We know that HMRC already holds all the information it needs to stamp out disguised remuneration schemes and rid the industry of criminal activity but is not taking a proactive approach. Real Time Information (RTI) reporting that was introduced in 2013 along with the 2014 Intermediary Reporting provides HMRC with two sets of data that gives a unique insight into the market and the supply chain. Matching that data should set alarm bells ringing and help HMRC to identify a dubious provider and shut it down with immediate effect.
Many contractors have been pushed into schemes and put themselves at significant personal financial risk. It is likely that with the introduction of the new Off-Payroll legislation on April 6th, many more contractors could be exposed to such schemes and that must not be allowed to happen.
We have been calling for HMRC to take a proactive approach and use its powers of enforcement to stamp out these schemes. HMRC needs to find a better way to notify potential users of arrangements, highlighting the risks and promoting the Personal Tax Account. Where a user is shown to have acted in a timely manner to change their affairs, no further action should be taken. If the data is being interpreted correctly, such arrangements should be identified within a quarter. If no action has been taken by HMRC within a 12-month period then, as with Self-Assessment, HMRC should be prevented from seeking recovery from the taxpayer and limited to recovery from the scheme promoter.
This step prevents taxpayers unwittingly being sold schemes that years later can destroy lives, as we have seen happen with the loan charge. The risks then lie firmly on the companies making these arrangements for a fee. Professional Passport advocates that there should always be the ability to transfer any debts to directors personally, as is the case with many other parts of legislation.
Sticky plaster approach
The inquiry also pointed out other issues within the supply chain with recruitment agencies demanding kickbacks or incentives from umbrella companies so that they are added to a supplier list and recommended to clients, contract workers being forced to use a specific umbrella, a lack of transparency over deductions and fees and general flouting of the legal requirement to provide workers with a Key Information Document that came into force a year ago, as well as the covert withholding of holiday pay and the unlawful deduction by umbrellas of employer’s taxes from contractors’ pay. Some have referred to the sector as the ‘wild west’ and I would argue that such behaviour has been allowed to happen because of the constant sticking plaster approach to legislation which is never going to provide a long- term solution. This approach, coupled with the lack of enforcement, has created the perfect storm.
The inquiry is calling for a proper strategic review as a follow up to the Taylor review and as part of that the Group is recommending that it investigates the best way to structure, remunerate and tax the contracting and freelancing sector so that a fair, transparent, regulated and workable solution is found. Hallelujah to that although acting on Matthew Taylor’s recommendations might be a good place to start.
And, when it comes to the inquiry’s recommendation to consider statutory regulation for payment intermediaries, this was suggested in 2006 and never adopted. It would take a minimum of two years and cost a significant amount of money. There are other models in operation across the financial services sector that may serve to provide our sector with the regulation being called for and would work to deliver a more robust compliant approach. Professional Passport is currently exploring these alternatives before making firm proposals and recommendations to the government to consider.
This latest report is hard hitting and the government must heed the recommendations and act. But I would urge them to take a collegiate approach; the government and the appropriate parliamentary committees need to hold regular round table events with trade bodies, associations and membership organisations throughout the supply chain to discuss issues and air problems which will help to identify new trends and shifts in avoidance schemes being offered. Transparent communication is key to defeating avoidance structures along with an increased educational programme by HMRC to reach all parties throughout the supply chain. Only by working together will we drive up standards and drive out those who are damaging the reputation of an entire industry and damaging the lives and livelihoods of innocent workers.
