Professional Passport has been pushing HMRC for a long time to use the data they already have to identify potential disguised remuneration schemes.
HMRC seems to have become more active recently in sending out their tax avoidance warning letters to workers suggesting they may be in a disguised remuneration or tax avoidance scheme.
In some ways, this is good news that they appear to be taking action. However, we have also stated that HMRC pursuing workers is the wrong strategy and incentivises promoters of these arrangements to remain in the marketplace, they should be seeking the recovery from the promoters.
The letter to the worker states:
We take action to challenge those who promote tax avoidance arrangements. However, you’re responsible for making sure your own tax affairs are correct.
It also states:
Your employer should make sure the right amounts of tax and NICs are paid to us for your earnings. However, in some circumstances you may end up being responsible in law for paying them…
The clear suggestion in the letter is that the liability could be the workers and is clearly designed to bring concern to the user in the hope they will act and leave the scheme. Obviously, if a worker is in a scheme, then yes, they should leave this as quickly as possible.
Could there be a more cynical reason behind these letters?
Whilst there is a principle within UK tax law that an individual is responsible for their own tax affairs this is overridden where they are employed by a UK employer who operates PAYE on the income. HMRC can challenge this overriding principle where they can show that the employee was aware of the arrangements. So, are these Tax Avoidance Warning letters no more than HMRC building a background argument to recover unpaid taxes from an employee by stating that they were informed and therefore must have been aware?
Have HMRC been buoyed by their actions against workers involved in loan arrangements and feel this is by far the simplest and most cost-effective way to seek recovery? The workers are a soft target and are unlikely to have the resources or ability to fight the claims.
If, as the letter states, ‘we believe they may have become involved in tax avoidance’ then the logical question is what action HMRC has also taken against the employer. Surely, they must have significant data to support writing to a worker and so in all these cases it would be reasonable to assume that they have also used some, or all, of their other powers against the suspected provider to protect their position – not in our experience. We are aware of workers who have received these letters and the providers are still operating openly in the market with no visible action taken.
So why aren’t HMRC opening enquiries on these companies at the same time the letters are being sent to workers?
Also why aren’t HMRC using their powers under security notices to seek funds from the companies to protect their position on under paid taxes?
It would also be reasonable to assume that as they can also identify the recruitment companies engaging the workers through these companies HMRC would have also written to them as well.
How should the recovery of unpaid taxes work?
In the first instance HMRC should seek recovery from the employer. The vast majority of disguised remuneration schemes fail to operate PAYE correctly on the workers earnings with a wide array of labels attached to the untaxed amounts. The fact that the employer has failed to operate PAYE correctly means that in all cases HMRC should use its powers to seek recovery of the underpayment from the employer.
They are also able to protect their position by using security notices requiring the employers to lodge funds with HMRC to protect the potential losses they have identified through the disguised remuneration scheme. Failure to comply with these notices would stop a provider from trading.
Where an employer fails to pay a liability HMRC also has the powers to transfer the liability to the directors of the company as a personal liability. They should then take all necessary steps to recover this from their personal assets.
If they are still unable to recover the liability, and where an agency has been involved, then they could seek to recover from the agency as not all the income has been applied as employment income and so the conditions in the legislation are not met and in certain cases this liability could be passed back to the recruitment company.
Only after all these steps have been taken should they seek recovery from an individual and only where they can show that individual was aware of the arrangements.
HMRC are persisting with bringing new legislation adding further layers of powers, why?
If they are not already using the vast array of powers, they currently have what difference will further powers make?
Is this merely to provide ministers with convenient sound bites so they can appear tough on tax avoidance and disguised remuneration?
It is difficult to come up with any conclusion that sits positively with HMRC or Government.
The arguments made around the loan charge have systematically been taken apart in the enquiries carried out and yet no changes or redress has been made.
There are strong rumours that many workers who had paid their taxes under the loan charge are now finding that their loans have been sold on and the new companies are seeking repayment of these loans. These people are now in the worst-case scenario and yet still the Government appears to wash their hands over this.
The actions still seem to avoid going after the promoters and appear to be building arguments to persist with the, in our opinion, flawed strategy of seeking recovery from the workers.
Whether this perception is correct or not we are seeing high levels of disguised remuneration in the market with common names emerging in many of the operations. This is getting to an levels of an industrial scale. Without too much digging significant information is in the public domain and yet HMRC still seem slow to act.
Professional Passport has proposed arrangements with HMRC that would restrict access to the market for many of these schemes but HMRC resist finding ways to take these suggestions forward.
It does beg the question whether they Government and HMRC are serious about addressing this or whether any of the growing number of conspiracy theories could actually hold some truth.