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Regulation 80 - A stealthy and unexpected tax charge

David McManus

David McManus | Personal Tax Manager

Wednesday 17th Apr, 2019

At the same time as the Spring Statement was presented by the Chancellor on 13 March, HM Treasury released a raft of public consultations around future tax proposals and the conclusions and reports from others which had closed.

Of note amongst the reports published was HMRC’S document titled ‘Tackling tax evasion, avoidance and other forms of non-compliance’. It comprehensively outlined the historical activities and future strategy being pursued by the Department in its attempts to reduce the ‘tax gap’ – the term used to describe the difference between the tax the Exchequer expected to receive and what it actually collected.

HMRC are committed to reducing the tax gap

The report continued to flag up HMRC’s unrelenting commitment to challenge tax avoidance schemes.

We know that certain contractors who were involved in legacy tax avoidance schemes, many of them offshore contractor loan schemes, face the intimidating Loan Charge from 5 April 2019 if they have not already entered in settlement discussions with HMRC. This contentious new charge has caught the headlines amongst the industry sector and more widely.

"There can be no doubt that HMRC’s relentless drive to close down avoidance arrangements, chasing evaders and changing behavioural attitudes towards compliance is here to stay."

However, the implications of HMRC’s wider attack on tax avoidance, in attempts to recover tax it feels it is entitled to as a result of failed schemes or its inability to collect tax from the direct beneficiary, is leading it up some unexpected avenues.

Know your supply chain

The recruitment industry should be acutely aware of the importance of its supply chain and the introduction of the intermediaries’ legislation which came into effect in April 2014 has brought this into sharp focus.

This legislation was introduced in part, to try to attack the income tax and NIC avoidance schemes which involved the use of offshore companies or employment intermediaries supplying workers to an end user via a UK intermediary. It was designed to make the UK intermediary (the last UK businesses in any chain of intermediaries) which is involved in the supply of the workers, their effective employer for PAYE and NIC purposes.

Where there is no UK-based intermediary, the UK based end user remained responsible for the PAYE and NIC (both employer and employee) deductions for the worker. However in many cases this liability may still fall on the staffing company because many will probably have agreed to indemnify end-users in this sort of event!

Introducing regulation 80

Various avoidance schemes were identified by HMRC which allowed contractors to receive their income in the form of loans from an offshore source even though the work they carried out was in the UK for a UK end user client. The arrangements involved a chain of agencies ‘supplying’ the workers and the final agency that contracted with the end user was often not aware of the exact structure of the supply chain.

Because HMRC cannot pursue the offshore agency and in the common event that their related UK based agencies no longer existed they have begun to look to assess those agencies closer to the end user.

This has manifested itself in the issue of what are known as Regulation 80 determinations or assessments, to recover the PAYE, and Section 8 notices to recover NI contributions, avoided by workers using these schemes. HMRC can use their powers to issue these determinations at any time within 4 years of the end of the tax year in which the payment was made – up to 6 years if the staffing company is thought to be ‘careless’.

Although these determinations have hitherto been limited in their numbers there is an expectation that we shall see more during March and April 2019 as we reach the 4 year time limit from the first operation of the 2014 legislation.

A robust, compliant supply chain is key

These HMRC activities to protect revenue make it essential that agencies carry out effective checks of all the links in its supply chain. We suggest that these checks should go beyond acceptance of a list of self-certified responses or confirmed membership of a trade association. Regular tests need to be carried out on PSCs, umbrellas and other intermediaries to whom payments are made in respect of contractor services. Spot checks need to be carried out on how and where workers are actually paid.

There can be no doubt that HMRC’s relentless drive to close down avoidance arrangements, chasing evaders and changing behavioural attitudes towards compliance is here to stay.

Related article - Tax evasion, tax avoidance, tax planning – what’s the difference?

This year’s Spring Statement from the Chancellor of the Exchequer has been rather overshadowed by Brexit but hidden amongst the various promised consultations appeared an HMRC report titled ‘Tackling tax avoidance, evasion and other forms of non-compliance’

We thought we’d share with you our view as to where we are now and where HMRC are planning to go next.

Read more here