IR35 finance concept. United Kingdom tax law, tax avoidance.

HMRC finally acknowledges link between off-payroll and non-compliant schemes

HMRC have issued an off-payroll briefing document which warns they “will challenge tax avoidance schemes that claim to avoid the off-payroll working rules or otherwise reduce the tax payable by contractors”

The premise of HMRC’s briefing issued today is to warn firms and contractors to comply with the off-payroll rules.  The briefing states that HMRC will help you meet your responsibilities, and will help you correct any mistakes.  However, they will challenge deliberate non-compliance, and will take action if contractors are engaged through artificial, contrived arrangements which are claimed to avoid the application of the off-payroll working rules or result in contractors paying less tax than should be the case.

It’s fairly standard rhetoric, to be expected at this stage with just weeks until the new legislation comes in.  You can read the full report here.

There is one very interesting point – an acknowledgement that the off-payroll changes may encourage people into non-compliant schemes.  This might not seem significant, however HMRC have always categorically denied any such link, including at a recent Parliamentary committee where a senior HMRC official kept to their party line.

According to the report, schemes “could include umbrella companies offering take home rates of pay that are too good to be true through artificial schemes…”  This does call into question HMRC’s rationale of knowingly introducing legislation which could lead to non-compliance, not to mention very large tax bills for unsuspecting contractors, yet failing to do anything to mitigate this consequence.

The government has planned to regulate the umbrella sector for a number of years now, originally aimed for April 2019, however the primary legislation required to bring about this regulation has not happened, and will certainly not happen before the off-payroll changes in April 2021.  Unfortunately the planned regulation was never going to be fit for purpose because it involved simply applying the recruitment agency conduct regulations to the umbrella sector, with the glaring gap of not addressing the tax implications.  So our view at IWORK is to shelve the original plan, and choose instead to develop properly targeted regulation for umbrella firms that will deal with non-compliance and make a genuine positive difference to the workers that use them.

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