What a better way for HMRC to tackle disguised remuneration might look like

It’s 40-odd pages long, but the first thing that ought to strike even the most rapid reader of HMRC’s new call for evidence to “tackle disguised remuneration tax avoidance” is the lack of separation between the innocent and not so innocent, writes Brian Burke, director at business advisory Quantuma.

There’s no nod to NC31

Indeed, it’s disappointing that the consultation document does not appear to draw a clear distinction between those who historically have become embroiled in Disguised Remuneration schemes -- usually following the advice that they were given at that time with some driven by the then-changes to IR35,  and those who despite the changing tax landscape and introduction of legislation have elected to (and continue to), utilise schemes despite the warnings by HMRC.

Personally, I feel that there is a marked difference between these two taxpayer groups and it seems some MPs agree, as that feeling appears to have motivated their NC31.

A much-needed acknowledgement

On a more positive note, it is pleasing that there is some recognition by the Revenue that there are many engagers, intermediaries and umbrella companies that are wholly compliant, along with a large number of contractors who continue to quite legitimately use PSCs and meet their tax liabilities diligently.

Additionally, the HMRC consultation appears to recognise that there is considerable benefit to businesses and acknowledges that they should have the ability to utilise contractors as is appropriate to their business, to meet their needs.

As a result, we believe any future actions from HMRC need to be focused on addressing the core, existing issues without exerting new pressures, compliance burdens, or costs to those contractors and other taxpayers who are already acting reasonably and responsibly.

Compliance considerations

Interestingly, according to the consultation:

•  “The majority of DR schemes today are used by taxpayers who provide their services to a third party, while working through an employment intermediary such as an umbrella company.” (Chapter 6, 57)

• “Due to the concentration of DR schemes being used through employment intermediaries, the government is interested in exploring the role of employment supply chains in the proliferation of DR schemes, and whether it should take further action to tackle any issues in this market”. (Chapter 6, 59)

It should be noted that before the radical suggestion, immediately above, of getting the supply chain involved in compliance, there is much from the government in the consultation in respect to the actions they have already been taken, plus a look at legislation enacted already to disrupt and eradicate mass marketed schemes.

How a HMRC ‘clearance system’ could really help, and work

 On the basis that HMRC are seeking to protect the taxpayer, not legislate further against him or her, I should like to see an approach from tax officials which is designed to engage positively and that in practice, will protect contractors. This is especially needed given that they are the party here which is most at risk, as it is the individual who becomes embroiled in HMRC action and who faces significant tax liabilities as a result.

Would it not seem sensible that contractors could be encouraged, obliged, or even required to approach HMRC for approval and clearance of a certain arrangement? For any period in excess of a sensible window of time (a month/four weeks), which it takes HMRC to confirm their acceptance or otherwise of their terms of engagement, the individual taxpayer or contractor should be subject to an ‘amnesty,’ so that no additional personal tax liability arises.

More powers for the taxman? Probably…

On the basis that taxpayers would have to provide suitably detailed information to HMRC, this process would swiftly highlight to the tax authority where a DR scheme was being marketed, and additionally it is likely that multiple participants would come forward seeking approval for the same scheme. Suitable powers could be provided for HMRC to obtain details of the other participants and there are existing powers available to deal with promoters and enablers.

And, should a contractor not seek such approval and clearance, then under this envisioned process, they do not obtain the benefit of the amnesty. So ultimately the responsibility falls to the individual to engage rather than the employer, umbrella or intermediary.

This process could be conducted online via completion of a questionnaire/clearance request with a receipt of acceptance for a contractor’s records and subsequent approval being issued. Engagers could request copies for their records, should they wish, where a contract is to be extended (as is often the case). Additionally, where there is a change of payment mechanism, the individual could seek similar approval or clearance with this to be granted ideally prior to effecting transition.

Protect and serve (to avoid a painful bit of history repeating itself)

It may be a simplistic approach, but it is the contractor who is ultimately impacted and so this is where HMRC should act -- in a supportive capacity. History has demonstrated that contractors were following the professional advice that was made available to them, and that their understanding was often that the payment arrangement (DR scheme) was effective and approved. The consistent point is, compared to the deduction of PAYE and NIC, that any new DR schemes being offered will promise a tax saving and thereby deliver enhanced income.

As contractors might therefore now be vulnerable, coming out of covid-19 with little financial support from the government, the taxman should use this consultation as an opportunity to move away from reactive efforts to clampdown on DR and towards proactive efforts to protect contractors and other affected taxpayers, especially now that such a large number of HMRC customers have voted with their feet and exited these schemes completely.