The Rise of Tax Avoidance Schemes due to Government Delays in Regulating Umbrella Companies
The gig economy has brought about significant changes in the world of work, offering flexibility and opportunities for self-employment. However, it has also given rise to issues surrounding employment arrangements and tax compliance. One such issue is the use of umbrella companies, which have come under scrutiny due to their potential for facilitating tax evasion and abusing workers’ rights. Government delays in regulating these arrangements have created a breeding ground for tax avoidance schemes, causing industry experts to sound the alarm.
The Role of Umbrella Companies in the Gig Economy
Umbrella companies play a crucial role in the gig economy by collecting income on behalf of freelancers from hiring companies or recruitment agencies. They deduct taxes and national insurance contributions before paying the workers. While many umbrella companies operate legitimately, there is an unregulated sector that has attracted increasing attention in recent years. This sector has seen operators facilitating tax evasion schemes or diverting funds from workers’ pay packages, exposing workers to potential exploitation.
A report by company compliance specialist PayePass estimates that the number of people working through unregulated umbrella arrangements has risen from 600,000 in 2018-19 to 700,000 in 2021-22. This significant increase highlights the urgency for effective regulation to protect workers and ensure tax compliance.
The Need for Regulation
Julia Kermode, CEO of PayePass, emphasizes that regulating the sector is essential to prevent more individuals from falling into tax evasion schemes. The government recognized the need for regulation back in 2018 and launched a consultation this summer to curb tax evasion and abuses of labor rights by umbrella companies. However, progress has been slow, leaving workers vulnerable and the tax system exposed to significant revenue loss.
The pace of growth in workers using umbrella arrangements has been staggering, particularly following the changes to off-payroll work rules in the private sector. Since April 2021, the decision on whether contractors are considered self-employed for tax purposes or employees has shifted from the workers to their contractors. As a result, affected contractors have increasingly turned to umbrella companies, inadvertently increasing their engagement with dishonest operators and tax avoidance schemes.
The Impact on Workers and the Economy
The consequences of these tax avoidance schemes are detrimental not only to workers’ livelihoods but also to the economy as a whole. Many workers have unknowingly had their income diverted into these schemes, only discovering the issue when faced with unexpected tax bills from HM Revenue & Customs. This not only puts workers in financial distress but also leads to a significant loss of tax revenue. It is estimated that tens of billions of pounds in uncollected tax are slipping through HMRC’s hands due to these schemes. It is imperative for the government to intervene promptly to protect workers’ rights and rectify the tax system.
Challenges and Proposed Solutions
The challenges of regulating umbrella companies and tackling tax avoidance schemes are complex. HMRC estimates that only a handful of avoidance promoters are still active, but their impact is substantial. To address this issue effectively, industry professionals and experts propose various solutions:
- Implementing new requirements for recruiters or their clients to conduct due diligence on umbrella companies, with penalties for non-compliance
- Transferring unpaid taxes from umbrella companies to other parts of the labor supply chain
- Cracking down on avoidance promoters by enforcing laws and holding them accountable
These proposed solutions aim to create a robust regulatory framework that protects workers and ensures tax compliance. However, their successful implementation requires prompt action from the government and law enforcement agencies.
The Government’s Response
The government acknowledges the risk posed by umbrella companies that abuse the system and has stated that action will be taken against bad actors. They are currently reviewing the feedback received during the consultation and will provide a response in due course. However, industry professionals argue that the government’s response should be more expedient and proactive to prevent further harm to workers and the economy.
Crawford Temple, CEO of Professional Passport, emphasizes the urgent need for law enforcement and a concerted crackdown on tax avoidance schemes. He criticizes HMRC for targeting the victims rather than the architects of these schemes. Temple suggests that law enforcement needs to prioritize holding those behind the schemes accountable to prevent them from prospering.
The Future of Umbrella Companies and the Gig Economy
The gig economy and the use of umbrella companies are likely to continue growing. With the rise of remote work and freelance opportunities, workers will continue to seek flexibility and independence. To ensure a fair and compliant environment, the government must prioritize the regulation of umbrella companies and actively combat tax avoidance schemes.
Summary
Government delays in regulating umbrella companies in the gig economy have led to an increase in tax avoidance schemes and abuses of workers’ rights. The unregulated sector of umbrella companies has facilitated tax evasion and diverted funds from workers’ pay packages, exposing workers to exploitation and leaving the tax system vulnerable to significant revenue loss. The government launched a consultation to address these issues but progress has been slow, leaving workers and the economy at risk. Industry professionals emphasize the need for prompt regulation, enforcement of laws, and accountability for those behind tax avoidance schemes. The future of umbrella companies and the gig economy relies on effective regulation and measures to protect workers and ensure tax compliance.
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Government delays in delivering on a 2018 promise to regulate umbrella companies (employment arrangements used by hundreds of thousands of self-employed workers) are leading people to turn to tax avoidance schemes that break the rules, industry experts have warned. industry.
Umbrella companies typically collect a freelancer’s income from their hiring company or recruitment agency, deduct tax and national insurance, and then pay the worker.
The unregulated industry has increasingly attracted scrutiny in recent years. While many companies operate legitimately, some operators have facilitated tax evasion tools on behalf of workers or, sometimes, solely for the interests of the parent company. benefit. Others have diverted funds from workers’ pay packages or withheld vacation pay.
A report this week by company compliance specialist PayePass estimated that the number of people working through unregulated arrangements has risen from 600,000 in 2018-19 to 700,000 in 2021-22.
Julia Kermode, CEO of PayePass, said: “[The regulation of the sector] it must be approached in the right way; Otherwise, more and more people will become involved in these tax evasion schemes.”
The government launched a consultation on ways to curb tax evasion and abuses of labor rights by umbrella companies this summer and was analyzing the responses.
It first promised to regulate the sector in 2018, in response to a review of modern working practices it had commissioned. But progress has been slow.
The pace of growth in workers using blanket agreements since changes to off-payroll work rules that hit the private sector had been “staggering,” Kermode said.
Since April 2021, the decision on whether contractors are considered self-employed for tax purposes (known as “outside IR35”) or employees has shifted from self-employed workers to their contractors. Similar rules were in force in the public sector in 2017.
Tenants affected by the rule changes have increasingly required independent workers to use umbrella companies, increasing the numbers thanks to the agreements. But this resulted in a growth of dishonest operators, Kermode said.
He added that he had seen “many cases” where the income of general workers was diverted into tax evasion schemes. Some workers only found out when they were hit with large, unexpected tax bills from HM Revenue & Customs.
“This is simply unacceptable. The government is very aware of the problems and must intervene to protect people’s livelihoods,” Kermode added. “The tax avoidance taking place means that tens of billions of pounds in uncollected tax are likely slipping through HMRC’s hands.”
But HMRC estimated that only a handful of avoidance promoters were still active and said it was determined to put them out of business. It has published details of 50 promoters, 14 directors and 54 tax evasion schemes. HMRC also issued 15 stop notices between August 2022 and the end of August 2023, requiring a promoter to stop marketing a tax avoidance scheme.
The government said it was reviewing feedback on the consultation and would respond “in due course”. He added: “Many umbrella companies comply with tax rules, however we recognize the risk posed by those who abuse the model and we will take action against these bad actors.”
However, industry professionals want faster action. Crawford Temple, chief executive of Professional Passport, an independent assessor of payment intermediary compliance, also said he was seeing “high levels” of tax avoidance schemes, and that this was “reaching industrial-scale levels”.
“HMRC is simply not cracking down on the schemes in a sufficiently concerted way and persists in pursuing the victims of the schemes rather than the architects of those schemes. The lack of law enforcement simply allows perpetrators to prosper,” he stated.
The government consultation He suggested several options to regulate the industry. These included a new requirement for recruiters, or their clients, to carry out due diligence on umbrella companies, with penalties for failing to do so. Another option was to transfer unpaid taxes from an umbrella company to another part of the labor supply chain.
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