HMRC’s latest contractor raid – What does it mean for your agency?

HMRC's latest contractor raid

30th July 2018

There’s certainly no doubt that authorities around the world are increasingly clamping down on tax evasion and new measures are continually being brought in to tackle the issue. Consequently, there really is nowhere to hide for those who devise or use schemes to avoid paying their fair share. In the latest move, the UK’s HM Revenue & Customs (HMRC) plans to launch a £3.2bn tax raid on tens of thousands of contractors who used offshore avoidance schemes, a step that agencies need to be aware of.

What caused this latest clampdown?

In the early 2000s, around 50,000 people used disguised remuneration schemes that allowed them to avoid paying income tax and National Insurance. The arrangements were complex but involved workers being paid with loans from overseas trusts instead of their ordinary income, indicating that they earned less than they did. The repayment dates would rollover, which has led HMRC to argue that “they are provided on terms that mean they are unlikely to be repaid so they are no different to normal income and are taxable.” According to HMRC, disguised remuneration scheme users, on average, earned twice as much as the average UK taxpayer.

At the time, this wasn’t illegal but in 2010, the practice was effectively outlawed following a high-profile case which saw a major Scottish football team, Rangers, slip into administration in 2012.

Around 65% of those affected were in the business services sector at the time, including management and IT consultants. A further 10% were in construction and just under 3% were nurses, doctors or teachers.

What action is HMRC taking?

The Revenue has instructed people to settle their tax affairs or face a charge on any loans which remain unpaid by 5 April 2019. The outstanding amount over the entire duration of the scheme – which the majority of contractors used for at least two years – will be rolled together and issued as a lump tax invoice in a single year. This, of course, means that many who used the scheme could face a charge larger than the overall tax liability. HMRC’s latest figures suggest that the average bill faced is going to be £64,000. This has caused anger among many contractors who argue that they are being taxed retrospectively for something that was legitimate at the time. HMRC rejects this and has stated that, “disguised remuneration schemes have always been an attempt to avoid tax.”

However, the taxman is offering a settlement opportunity for those with a taxable income of less than £50,000 in 2018-19, giving those who fall into this bracket five years to pay the charge. Individuals with a higher liability may also be given longer to repay their outstanding tax.

HMRC also says it has powers to pursue the promoters of these schemes and can issue fines of up to £1 million, which highlights just how important it is for agencies to ensure that they are not facilitating tax avoidance.

Don’t risk breaking tax laws

This latest move from HMRC shows that the risks associated with international contractor placement are growing.  If something seems too good to be true, it probably is, and the authorities will eventually catch up with those involved in fraudulent activity. We strongly advise partnering with experts who will ensure that your agency and its workers are compliant. Contact the team today.


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