Government proposes tax avoidance and umbrella firm crackdown

The government intends to pass new laws in the next Finance Bill

A new policy paper detailing the government's plan to protect contractors from non-compliant umbrella firms and loan scheme promoters, as part of its efforts to curb tax avoidance.

The government is currently consulting on the draft legislation and intends to pass new laws in the next Finance Bill. The legislation would give more powers to HMRC to tackle entities promoting tax avoidance schemes.

The government first announced the plan in November 2020, and launched a 10-week consultation in March 2021, which closed in June.

The consultation on the draft legislation is open until 14th September 2021.

The policy paper advises the government to curb tax losses by targeting overseas promoters, as well as the British entities that support them in tax avoidance schemes.

'The proposed changes would create a liability on promoters' UK associates, to penalise them for assisting [the] offshore promoters' activities,' the document states.

'The government is committed to maximising the deterrent effect of penalties so that facilitating or collaborating with an offshore promoter to see their scheme in the UK is no longer a viable entity.'

HMRC could gain new powers to freeze a promoter's assets. That would ensure that promoters are unable to hide their assets, and would have to pay all financial penalties they face for breaching obligations.

The document also advocates giving HMRC powers to present winding-up petitions to the Court for firms operating against the public interest.

One of the main aims of the consultation is to empower HMRC to share details of specific promoters and their tax avoidance schemes at the earliest possible stage, to warn taxpayers of the risks.

"HMRC's intentions to clamp down on tax avoidance is to be applauded, albeit that it was disappointing that only 18 stakeholders responded to the consultation," said Crawford Temple, CEO of Professional Passport, a firm that assesses the compliance of umbrella companies.

"However, yet more legislation is not the right course of action," he added.

"A catalogue of legislation introduced over many years has resulted in a series of unintended consequences and much of it has not served to help and support the contracting sector and the whole supply chain for the better."

In April, the Loan Charge All-Party Parliamentary Group (APPG) released the findings of a new investigation, examining in detail how freelance workers and contractors should be 'remunerated and taxed fairly and appropriately' for the work they do through umbrella companies.

The investigation reviewed various measures the government could take to prevent tax avoidance schemes being promoted in the contracting sector.

The APGG report advised the government to introduce statutory regulation to clean up the supply chain, where many of the issues associated with disguised remuneration schemes take place.

This week, the government also announced simplified tax reporting for self-employed and small businesses, as part of tax system reforms.

The changes will come into force by 2023, and should help small businesses spend less time filing their taxes.