In our guest blog, the HMRC explains what employers can do to be more aware of tax avoidance schemes and explains how this new approach will help individuals caught up in these schemes to better understand the risks they face.
There are some really important changes coming for employers next year around tax avoidance schemes. HM Revenue and Customs (HMRC) is advising local authorities to perform due diligence checks to ensure their workers are not being drawn into tax avoidance schemes. From next April, councils should be sure that staff employed via a third party such as an agency, contractor or sub-contractor, or those who outsource their payroll services, are paying the correct amount of tax.
What is tax avoidance?
Tax avoidance involves bending the tax rules to gain an advantage never intended by Parliament. It often involves contrived and artificial transactions that reduce the amount of tax that someone pays and deprives public services of the vital funding they need.
Most tax avoidance schemes simply do not work, and those who use them may end up having to pay much more than they would have if the correct tax and National insurance contributions (NICs) were deducted.
Tax avoidance schemes
Agency workers working for local authorities getting caught up in disguised remuneration schemes, often referred to as loan schemes, has been well covered by the media in the past.
These loan schemes are tax avoidance schemes that claim to avoid the need to pay the correct amount of income tax and NICs. They often involve converting income into a loan (or other payments from a third-party) which is unlikely to ever be repaid. Scheme promoters tell workers that the payment is non-taxable because it’s a loan, however this is not true so could cost the worker more than they saved up front. Most promoters of tax avoidance schemes will also charge a fee.
Although most umbrella companies are compliant with the tax rules, many of the new avoidance schemes involve self-described umbrella companies, seeking to disguise the scheme user’s remuneration.
Potential users of these schemes include contractors like agency workers, temporary staff, and freelancers. They may be tempted by arrangements that are described as a way of taking home a larger portion of their income or to simplify their tax affairs but are in reality tax avoidance schemes.
The risks of using tax avoidance schemes
HMRC want to ensure that workers employed via a third party are aware of the risks of using disguised remuneration or other types of tax avoidance schemes.
HMRC will always challenge tax avoidance schemes. Anyone involved in these schemes is likely to have paid the incorrect amount of tax on their income. They may end up having to pay additional tax, NICs and interest. Penalties may also apply, and it is unlikely that they will be able to recover any fee paid to the promoter. HMRC’s advice is to steer clear of tax avoidance; if something looks too good to be true, then it almost certainly is.
What should local authorities do?
Local authorities should conduct due diligence checks to make a judgement on the integrity of the labour supply chain and the transactions within it. Checks undertaken purely in relation to immediate suppliers and customers will not necessarily be enough to identify this as exploitation because fraud and avoidance are often found further down the chain. It is also important to consider the credibility of the supply, payment arrangements and other surrounding circumstances.
Using Supply Chain Due Diligence Principles of ‘Check’, ‘Act’ and ‘Review’ (CAR) will help local authorities apply effective risk management and robust due diligence to assure the integrity of their supply chains, minimising exposure to risks:
- CHECK – for risks and obligations, for your own organisation and those of your suppliers.
- ACT - carry out robust due diligence on your suppliers, and if risks are identified do not ignore them. Act to mitigate or remove the risk completely.
- REVIEW – effective due diligence requires continuous monitoring & review. Ongoing, meaningful risk assessments will help to identify risks that could cause losses or harm.
Local authorities should also be aware of the possible employment status consequences of different labour supply chain structures. If the local authority contracts a worker to provide services through the worker’s intermediary, it will need to decide if the off-payroll working rules (IR35) apply.
Guidance on the off-payroll working rules in the public sector can be found on GOV.UK. This guidance also includes details of the additional responsibilities that local authorities will have under the off-payroll working rules from 6 April 2021.
Where the local authority has performed relevant, reasonable and proportionate due diligence checks, established the status of the individual and then passed the decision onto the agency, they may then be deemed to have devolved their responsibilities.
Responsibility for due diligence and liability continues with the agency and throughout the labour supply chain to the umbrella company.
What are the risks to a local authority?
Each local authority or organisation must decide what checks are relevant, reasonable & proportionate for their risks. Completing these checks will also help satisfy a number of legal obligations which is particularly important where labour is supplied by a third party such as through an agency, contractor or sub-contractor, or where a payroll service is outsourced.
HMRC recommend that local authorities develop a good understanding of their labour supply chain and conduct due diligence checks on agencies they deploy to confirm they are bona fide and correctly registered.
If the authority becomes aware that the agency or umbrella company is not following the rules, they should take action to address this in order to reduce potential financial, operational and reputational risks for the authority.
Tax avoidance arrangements should be reported to HMRC.