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HMRC campaign causes collateral damage

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26th Jul 2016
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Innocent employment agencies are being hit with tax bills relating to a tax scheme which they had no idea existed.

Rebecca Cave caught up with Philip Fisher, AccountingWEB columnist and BDO partner, to find out more about the issue. 

Tax scheme

Investigations by BDO have uncovered a tax avoidance scheme which offers individuals an effective 1% rate of tax, if they pay 16% of their earnings to a scheme promoter. The scheme has reputedly been sold to more than 2,000 individuals and HMRC is now trying to recover the tax that they avoided.

The scheme appears to involve a single employer and a trust or alternatively an individual located in a tax haven, as well as one or more UK-based companies. The employees are apparently rewarded with non-taxable loans rather than more traditional forms of remuneration.

Caught in a trap

The workers caught up in this scheme have been recruited to work in multinational companies across the UK, with contracts that pass through a chain of UK employment and recruitment agencies. Many of the employment agencies at the top of the chain, who supply workers directly to the multinational companies, had no idea the tax avoidance scheme was in existence, even where they had carried out a reasonable level of due diligence with the smaller UK-based companies they source workers from. 

Several of those top-level employment agencies have received assessments raised under reg 80 of the PAYE rules (SI 2003/2682), which demand huge sums of tax.

HMRC powers

Where PAYE has been avoided in a supply chain, HMRC has the power to collect that tax from any company in that chain, if one or more of the parties is based overseas (ITEPA 2003 s 689). This is the legislation used in this case, which has been combined with assessments raised under regulation 80 to demand the tax avoided from the “indirect” employers.

Fisher and his colleagues at BDO have seen a number of regulation 80 assessments in recent months, and conclude that HMRC has issued hundreds of similar tax assessments to UK-based employment agencies.

What to do   

Fisher recommends that recipients of such tax assessments should immediately lodge an appeal with HMRC and request postponement of all the tax demanded. When HMRC respond, the taxpayer should request a statutory review from HMRC. Those reviews are now carried out by the solicitors’ office within HMRC, so should be genuinely independent of the HMRC officers who raised the regulation 80 assessment.

Quantum of tax

A key point to address with HMRC is the how the tax demanded in the reg 80 assessment has been calculated.

Fisher said this is key: “Although the agency will know what they have paid to the third party supplier for the worker’s time, that agency will have no idea of how much the worker eventually receives, or of the effective tax rates which should be applied to that income.

Fisher added: “There is danger of double taxation in this process, as even if the employment agencies pay up, the individual workers will also be asked to pay income tax on the remuneration or dividends that they have received from the managed service company, or personal service company in the chain.”

 

Have you seen any similar regulation 80 assessments raised on your clients? Let us know the circumstances by posting below.

Replies (12)

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By tonyaustin
27th Jul 2016 13:10

This is surely a contractor loan scheme. There are many operators and HMRC counter avoidance are attacking all of them. HMRC have issued a Spotlight and guidance notes on dealing with these schemes

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By David Gordon FCCA
27th Jul 2016 13:42

The solicitors' office within HMRC is not "Independent" of HMRC.
It is correct that this office will review a matter independent of the HMRC officer(s) involved. Importantly, however, unlike a tribunal, the office will give an opinion only strictly in accordance with Revenue Law, HMRC practice, and or interpretation.
A Tribunal is fully independent in that it is able to take account of the circumstances surrounding the matter. This does not mean a Tribunal will go against Regulation, but it does mean as in common law matters, that Tribunal has the power, and does, take into acount mitigating circumstances and or does rule as leniently as possible within the regulation.
I do not have much sympathy for agencies caught in these schemes. The schemes have been around for years. Guarding against being caught out is not rocket science.
In my experience the reason the agents went along with this was because it meant the value of tax benefit might be shared. So that the ultimate contractor would pay less for skilled engineers than might otherwise be the case.
Again, let us not forget, this was not tax evasion. This is reading the law as it is writ.

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By graweb901
27th Jul 2016 15:17

I think it might be said that this escalation of HMRC's campaign against contractors was not entirely unexpected. Certainly the schemes of past years included the recruitment agency as part of the process and whilst perhaps the parties here are innocent, it's hard to understand that they would have been completely unaware of the situation.
More worryingly, we see HMRC repeating a pattern here. Despite having information and disclosure of schemes from perhaps 2004, it was only in 2010 that some action was taken and again only in 2014 that HMRC's position on these schemes became even vaguely clear. Even now, aside from one case that can be laid aside on its facts, there is no legal or judicial sanction for HMRC's views. It will be interesting to see how the agencies will resist the imposition of PAYE.

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Replying to graweb901:
Ronthetax
By ronlfoot
27th Jul 2016 16:42

I'm no expert in this field but it seems to me that a UK resident receiving income from stuff what he does should be liable to full UK tax and NIC regardless of how many intermediaries are involved in the process. The in-between processes are just sophistry.

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Replying to ronlfoot:
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By brown-yuk
27th Jul 2016 19:34

They are explicitly more than mere sophistry.

But they may attempt tergiversation.

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Replying to brown-yuk:
Ronthetax
By ronlfoot
09th Aug 2016 12:51

Tergiversation?

Wow, that's a new word for my lexicon and I'm a bit of cruciverbalist. Thank you.

But you are right. What was it that old Khyyam said about grasping this sorry scheme of things entire and remoulding it nearer to the heart's desire? Or something like that. One can only live in hope - until we die.

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By Andy Davis
27th Jul 2016 17:01

The issue here is that the end user of the Contractor's services did not know, and had no way of knowing that a loan structure sat behind their contract in a lot of cases.
They were merely paying market rate to an agency for the provision of a contractor.
HMRC continue to raise these APN's, and in the cases that I have seen have consistently failed to:
a. Calculate the APN correctly; or
b. Satisfy the grounds to issue a valid APN.
The Companies issued with the APN's in this fashion should apply for a judicial review process to get the APN overturned or withdrawn, a costly and time consuming process (Especially for a business that has done nothing wrong in the first place!)
Yet another example to illustrate why HMRC should never have been given this power in the first place.

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By North East Accountant
28th Jul 2016 08:22

I am surprised at how stupid (or greedy) some people can be.

I have had many of these type of cases crop up. Case in point. Guy I have known of 30 years comes to see me about some tax advice on his circa £150K earnings re self employed, company etc. Company he works for relaxed how he gets paid. Friends of his working for the same company are paying "17%" on all earnings and he wants the same. Advised him about contractor loan schemes, HMRC spotlights and strongly strongly advised against it, saying we would not act for him if he goes ahead.

He decided he going to go the same way as his friends and just pay the "17%" and keep 83%.

I look forward to seeing him again when he comes back to get the mess sorted out in years to come.

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By North East Accountant
28th Jul 2016 08:22

I am surprised at how stupid (or greedy) some people can be.

I have had many of these type of cases crop up. Case in point. Guy I have known of 30 years comes to see me about some tax advice on his circa £150K earnings re self employed, company etc. Company he works for relaxed how he gets paid. Friends of his working for the same company are paying "17%" on all earnings and he wants the same. Advised him about contractor loan schemes, HMRC spotlights and strongly strongly advised against it, saying we would not act for him if he goes ahead.

He decided he going to go the same way as his friends and just pay the "17%" and keep 83%.

I look forward to seeing him again when he comes back to get the mess sorted out in years to come.

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By graweb901
28th Jul 2016 11:11

The comments above display a fairly common picture. Clients want the same treatment as their peers and there are plenty of promoters out there willing (for a 15%+ fee) to provide it.
We have many hundred such clients and common themes are that they started with a poor understanding of the structure and either did not ask the right questions or when they did were given plausible answers. The salesmanship was and continues to be very slick. In some cases promoters claimed that a DOTAS SRN was "proof" that HMRC had approved the scheme!
In a distressing number of cases, clients report that their accountant recommended the schemes. I cannot guess as to why that was (or I could but not here) but the result is that many of those clients no longer trust the accounting profession. Given they feel betrayed by HMRC whose lack of action results in tax allegedly due for many years being demanded in 90 days, they are left in purgatory. Not a great place to be.
It might be argued that they tried to avoid tax and deserve all they get. I might argue that a non tax specialist, comparing himself to his peers, wanting to compete on price for a job, advised by an accountant at the time that the scheme was "legal" and "complaint", made a decision for the right reasons. Silence for a decade from HMRC reinforced that view.
It's tempting to apply a retrospective view to that situation and the view from today's moral high ground may say that they were foolish and should pay up. I would ask you though to consider the part played by the accounting profession in a good number (not all) of cases and remember John 8.7

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Replying to graweb901:
Ronthetax
By ronlfoot
12th Aug 2016 14:44

Ah, the old John 8.7. Aren't we supposed to be shriven by membership of one or other of the august bodies which theoretically represent us, by practice assurance and all the other malarkey?

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By AndrewV12
19th Nov 2016 14:16

The scheme appears to involve a single employer and a trust or alternatively an individual located in a tax haven, as well as one or more UK-based companies. The employees are apparently rewarded with non-taxable loans rather than more traditional forms of remuneration.

None taxable loans instead of wages, must be the most ludicrous none nonsensical, wallyish, foolhardy, schoolboy method of avoiding tax i have ever heard, HMRC must have laughed there heads off when first reviewing its flaws. At least make it complicated and give HMRc the run around.

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