HMRC have published new research, ‘Understanding tax avoidance arrangements used by contractors’, undertaken in 2018 to help HMRC better understand how contractor tax avoidance schemes are promoted and how contractors view such schemes.
HMRC’s intends to use the research findings to develop strategies designed to both tackle existing tax avoidance and prevent the future usage of avoidance schemes, which they estimate accounts for £1.7bn of the £33bn tax gap.
The research consisted of ten face-to-face interviews with employment agencies and thirty with a range of contractors. It considered how contractors think and talk about tax avoidance, what makes schemes attractive to them, how they view settlement with HMRC and what awareness there is about umbrella companies amongst contractors and employment agencies. The key findings were:
Employment Agencies
- Employment agencies had mixed awareness and understanding of contractor loan schemes.
- Most used umbrella companies and not all had a detailed knowledge of how using them changed their tax liabilities. Some were aware of umbrella companies pushing non-compliance.
- All agencies said they ensured they were fully compliant and were not engaged in an activity that would be considered illegal.
- Some thought the use of contractor schemes was declining but some felt it was on the rise.
- All agencies claimed to follow legislative changes to the tax system that could impact them. Some had limited awareness/understanding of key changes such as the Disguised remuneration loan charge and Managed Service Company legislation.
Contractor views
- Many contractors found it difficult to distinguish between tax avoidance and tax evasion, as did some of the employment agencies, and some had little interest in understanding tax.
- Opinions about tax were primarily formed by the media, conversations with colleagues/friends/family. In some cases, accountants, but rarely HMRC. These conversations were key factors in encouraging contractors to enter avoidance schemes.
- Based on their own experiences, contractors saw the use of avoidance schemes as being ‘very common’ and a ‘normal’ part of working as a contractor.
- Contractors stated that tax avoidance schemes were attractive because:
- They allow them to keep a higher proportion of their pay.
- They reduce the administrative ‘headaches’ placed on the contractor.
- Schemes are sold as legal/HMRC approved.
- The widespread use of schemes in their industry created a sense of legitimacy.
- All these attractions were used by scheme promoters to target contractors, through various mediums e.g. word of mouth, internet adverts and cold calling, plus compelling sales pitches.
- Most contractors felt they had got involved with their scheme unwittingly and considered themselves victims of the companies administering the schemes, stating:
- They did not know their involvement in the scheme would result in contact from HMRC.
- They genuinely felt the scheme was legal and HMRC-approved.
- Some contractors had taken steps to close their case to avoid interest accruing and remove the stress of having it ‘hanging over them. Others were challenging it via collective action.
- Contractors suggested HMRC should:
- Stop companies administering tax avoidance schemes/punish those that do and provide clearer guidance about what they find acceptable which would remove the need for the settlement process.
- Be more transparent and take a more collaborative approach to settlement which would make some more inclined to engage with HMRC about settling their schemes.
- Contractors generally had a low awareness of recent/forthcoming changes to legislation, but many were aware of the loan charge which is extremely unpopular among contractors.
- Some thought HMRC’s ability to take retrospective action would result in fewer people staying in contracting, others felt it fostered a general mistrust of government.
HMRC conclusions
The conclusions drawn by HMRC from the research are that they should:
- Continue working to increase awareness of, and knowledge about, tax avoidance to discourage contractors from getting involved. This should be communicated via a wider range of channels with communication around settlement perhaps being less antagonistic.
- Continue to work with representative bodies to spread messages about some umbrella companies’ non-compliant activity among employment agencies.
- Work collaboratively with compliant employment agencies to identify non-compliance amongst umbrella companies
Links to our useful guides
Disguised remuneration zone
Our editorial area, all about Disguised Remuneration and the Loan Charge. Guides explain how to settle with HMRC in respect of any pay that has been disguised as loans and includes contractor loans and Employee Benefit Trust loans.
HMRC Spotlights on contractor avoidance
This section, 'When a tax inspector calls', comprises free articles and guides that look at policies on tax strategies/avoidance and tax investigation news, including serious fraud and disclosure facilities.
Contractors & PSC Planning: what now? (subscriber)
What is the best advice, right now, for Personal Service Companies (PSCs) and contractors?
External link
Understanding tax avoidance arrangements used by contractors