The Economic Affairs Committee (EAC) in the UK had recommended in a House of Lords report that the Government should revaluate loan charge. According to the report, there has been ‘disturbing evidence’ of abuse by HM Revenue &Customs (HMRC) in tackling pay schemes disguised to avoid taxes.

The report has cited an example of a social worker employed by a local council who had been fired and then re-engaged as a contractor for five years, and then again re-employed as an employee. This has left the work with one and a half year’s salary equivalent of loan charge creating financial problems for the worker.

The report has called for a creation of an independent body to review HMRC operations. This proposal has been supported by professional bodies that back contracting professionals.

According to the CEO of Contractor Calculator, David Chaplin, there is a desperate need of oversight of HMRC to ensure accountability and also fairness for individual taxpayers. If such a body had existed, the loan charge that had caused deep financial problems for contractors would not have been approved.

However, a Government representative commenting on the report stated that the Government wants to make sure that people pay their share of taxes so important public services can be funded. That’s why HMRC has been given powers to crack down on individuals and companies that don’t pay taxes. He had said that strict measures were required against tax evasion and avoidance practices

Due Diligence with Regards to Contracting Professionals

Ms. Julia Kermode, CEO of Freelancer and Contractor Services Association (FCSA) says that the Criminal Finances Act (CFA) make recruitment firms and companies legally responsible for tax evasion practices in the supply chain. If caught, it can lead to criminal conviction and hefty fines. They need to avoid recommending any scheme to workers that are created to evade taxes.

Ms. Kermode stated that recruiters need to ensure that no one is engaged in tax avoidance schemes in the supply chain. They need to ask questions such as whether the supplier is paying the right NI, VAT,and PAYE tax to HMRC. It’s important that the recruiters ask whether the supplier is contracting with a third-party entity in the UK. Also, recruiters need to confirm whether the company through which they engage the workers is the one that pays to them.

Investigating the supply chain for compliance with tax rules is particularly important in the current scenario when IR35 reform in the public sector has facilitated tax avoidance schemes. With the extension of the reform in the private sector in April 2020, due diligence will be required in both the public and private sectors in the UK.