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A broken umbrella | AccountingWEB | The time for tolerance on tax avoidance is over
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The time for tolerance on tax avoidance is over

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Crawford Temple rails against the absence of measures to address non-compliance from umbrella companies in the Spring Budget.

21st Mar 2024
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For years, the government has taken a disturbingly lax approach to the rampant tax non-compliance and avoidance in the umbrella company market.

In the Chancellor’s Spring Budget there was a brief mention that we will hear more about its plans to tackle non-compliance on Tax Administration and Maintenance Day with more guidance set to follow in the summer. 

I would like to remind the government and policymakers that whilst they continue to drag their feet the promoters of tax avoidance schemes continue to prosper with contractors paying the price.

The price of wilful inaction

This wilful inaction has opened the floodgates to criminal activity where shady operators can flagrantly ignore the rules without consequence, punishing the many compliant firms who are trying to compete on an unlevel playing field.

The evidence of exploitative practices and systemic misconduct is overwhelming. HMRC's own published list names 67 criminal umbrella firms engaging in tax avoidance schemes – and industry experts believe this is merely the visible portion of a much larger iceberg. With no credible deterrent or accountability measures in place, these promoters have zero incentive to follow the law when undercutting compliant companies provides such a lucrative competitive advantage.

Enough excuses. Enough delays. Enough passing the buck while ordinary contractors suffer tremendous financial losses at the hands of unscrupulous players gaming a compromised system. For too long, the government has regrettably elected to turn a blind eye as these schemes proliferate unchecked, lining their operators' pockets through disguised remuneration scandals and other illicit practices.

Policy paralysis

The lack of urgency is inexcusable. Over two years have dragged by since the original call for evidence into problematic umbrella company conduct. Since then, there has been consultation after consultation, evidence session after evidence session, discussion papers and forums galore – yet still, no meaningful enforcement action has materialised.

Instead, the can continues to be kicked down the road while the non-compliance crisis only worsens, tarnishing the whole sector.

Of course, the government is not ignorant of the issue. It is fully aware of the pervasive problem, having dedicated ample time and resources to studying it ad nauseam through review after review after review. But amid all these fact-finding exercises, meaningful deterrents and real-world accountability measures have remained unacceptably absent.

This policy paralysis is enabling continued exploitation on a massive scale. With no harsh penalties or strict enforcement to fear, shadiness remains highly profitable for disreputable players. Only credible threats and draconian consequences can finally shift the incentives away from non-compliance as a viable business model.

What should the government do?

The government is not impotent here. It already possesses the necessary tools to combat this systemic tax avoidance. Real Time Information (RTI) reporting that was introduced in 2013 along with the 2014 Intermediary Reporting provides HMRC with two sets of data that give 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.

By equipping HMRC with greater resources and expanding its enforcement capabilities, the long overdue crackdown could finally begin. Robust monitoring, aggressive prosecution, and substantive punishment of offenders are crucial first steps to upending the current perverse incentive structure.

The umbrella market's credibility and integrity decompose further with each passing day of government complacency. Sweeping reforms backed by harsh accountability are urgently needed to finally purge the system of its malignant elements.

Until the government summons the courage to stop tolerating rampant tax avoidance, ethical firms and contractors will keep paying the price as shady opportunists continue to do business unchallenged.

Replies (7)

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By Paul Crowley
21st Mar 2024 10:23

The Government needs to spend money and recruit tax evasion investigators.
They would increase the tax take by 10 times their cost in year one.

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By Paul Crowley
21st Mar 2024 13:54

Tax avoidance?

Failed schemes are evasion

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Replying to Paul Crowley:
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By Trethi Teg
21st Mar 2024 16:57

All taxpayers have the right to minimise the tax they pay to the legal minimum. If you do not believe this and argue there is some sort of "moral obligation" then that's fine, pay the extra yourself but do not try to impose your views on others.

If a taxpayer seekd to reduce their tax in the belief that what they are doing is legal, having taken advice from suitably qualified experts and that is eventually proved ineffective in the courts then so be it. That is not evasion and should not be described as such. If tax law was that stright forward there would be no tax cases in the courts.

However, if the taxpayer is attempting to use arrangments which are know to be illegal then, yes, that is evasion and should be dealt with accordingly.

The problem we have is that there are a small number of promoters who know very well that what they are doing is wrong and dont give a damn. This includes all the umbrella companies. They trade, sink the company, form a new company and continue.

By a little research I suspect I could find out who they are in a matter of weeks.

With the resources and information HMRC have they must certainly be able to know precisely who is doing what. They should then go after them and criminally prosecute.

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By Jdopus
21st Mar 2024 17:43

They have clearly adopted a policy of going after the little person who works for the Umbrella company, who can't defend themselves. I've been handling these investigations for years and the common pattern appears to be:
-Employee gets their job cancelled by Big Org or Government themselves
-Told if they want to work they have to work via Umbrella company
-Try to find an Umbrella company, do all due dilligence, pay extra to make sure it's being done right.
-The Umbrella company turns out to be fraudulent and pay none of the PAYE over to HMRC.
-HMRC then come after the Employee and forces them to pay all the taxes that were supposed to be taken by the Umbrella company while the Umbrella company skips off into the sunset.

Over and over again.
I have asked HMRC on multiple occasions through every official channel I can exactly find, exactly what an individual can do in this situation to avoid being caught out and assessed for the unpaid taxes the Umbrella company failed to declare and at every point HMRC have ignored the question and refused to answer.

Why would they care? They get paid, the Umbrella company gets rich pocketing the taxes and the only person who loses is the financially untrained member of the public.

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By DMS
22nd Mar 2024 10:14

Umbrella companies would not exist if HMRC allowed the contractor and sub-contractor to define the terms of their own engagement. The self employed take a calculated trade-off - reduced benefits and security of employment in return for more freedom and potentially better returns. What is wrong with that? It provides flexibility in a workforce that is no longer operating in a 'job for life' culture.

The only people who object are government, because they have such a ludicrous system of NI. The charge against contracting is driven purely by greed. They interpose themselves into a private agreement purely to fund their desire for cash.

Let's get something straight - government don't have any automatic right to peoples' money or wealth. The way this argument is framed in this article gives the exact opposite opinion. Businesses and taxpayers are entitled to know how the law applies, but IR35 has meant that is impossible for up to 15 years because of the insane mental gymastics involved in determining status.

Rather than look at tax evasion as a crime, look at government extortion as the crime.

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Replying to DMS:
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By mwalker
22nd Mar 2024 13:18

Wholeheartedly agree with this comment!

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Replying to DMS:
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By AndyC555
03rd Apr 2024 09:14

"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."

The wonderfully named American judge Learned Hand

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