Members of a House of Lords committee have called on HM Revenue and Customs to “constantly review” the business practices of its contractors after it emerged that 15 were known to have used a controversial tax-avoidance measure the department is cracking down on.
Lord Bridges of Headley said the tax-collection agency needed to practise what it preached following a session of the upper chamber’s Economic Affairs Finance Bill Sub-Committee that heard HMRC knew people who worked for it had used so-called disguised remuneration schemes.
The recommendation was one of a selection made in relation to HMRC’s work on the controversial Loan Charge, created to claw back tax estimated at up to £3.2bn from individuals who received payment for work in the form of “loans”, which meant they were taxed at a lower rate than income.
Committee chair Lord Bridges said in a letter to financial secretary to the Treasury Jesse Norman that HMRC director of counter-avoidance Mary Aiston had confirmed officials knew of 15 occasions where a contractor doing work for HMRC was at the same time using a disguised-remuneration scheme.
In her evidence to the committee, Aiston said that five contractors had “already stopped” when their disguised-remuneration activities came to light, while the department “took immediate action” to end the contracts of the other 10.
“We are clear with the agencies that we work with that they need to meet the certain standard,” Aiston said. “If we found that the agency was not, then that is something we would take very seriously.”
At least 50,000 people are understood to have made use of disguised remuneration schemes to pay less on their earnings than would have been the case if payments were declared as income. The Loan Charge was announced at Budget 2016 and was introduced in the Finance Act (No 2) 2017. It originally applied to loans made since 6 April 1999 if they were still outstanding at 5 April 2019.
In addition to calling on HMRC to “continually review” its suppliers to make sure they are not using aggressive tax-avoidance vehicles, peers said the department should look again at its “reasonable disclosure” rules for those acknowledging past use of disguised remuneration schemes.
They also said HMRC should be doing more to stop the promotion of disguised-remuneration schemes and that taxpayers should be given extra time to pay off their Loan Charge debts, with a further extension to December 31 this year.
Bridges accepted HMRC had made progress in the way it managed the Loan Charge and in tackling promoters of disguised-remuneration schemes. But he saisd there were “far too many shortcomings” in the way its response to 2019’s Morse Review was being implemented.
“What HMRC commits to is all too often not reflected in what taxpayers experience with regard to the Loan Charge,” he said.
“We welcome that HMRC is doing more to tackle disguised remuneration schemes at source, including the marketing of these types of scheme through its work with the Advertising Standards Authority.
“However, it must do more to reduce the exposure of taxpayers to such schemes in the first place. There should also be a renewed focus on ensuring consumer protection and preventing the mis-selling of schemes.”
“HMRC should practise what it preaches and take further steps to avoid using employment agencies and contractors that use disguised remuneration or other tax avoidance schemes.”
In response to the report, HMRC said that it had "never endorsed or participated in disguised remuneration tax avoidance schemes".
It said in a statement: "It is possible for contractors to use disguised remuneration without the participation or knowledge of their engager.
"Whenever it is discovered that a contractor, providing services to HMRC or RCDTS, is currently using a disguised remuneration scheme, HMRC (acting as the engager of contingent workers) acts promptly to terminate the relevant engagements.
"We do not investigate these cases any differently to other cases of suspected disguised remuneration, we are even-handed and treat all taxpayers equally.
"We continue to warn people about the risks of using tax avoidance schemes and our advice remains true – if something looks too good to be true, it almost certainly is."