HMRC has intensified its crackdown exploitation of tax loopholes
Recruitment firms are concerned about potential business closure as the government considers measures to address tax avoidance by ‘umbrella companies,’ according to multinational law firm Pinsent Masons.
The Treasury, HMRC, and the Department for Business & Trade have launched a consultation titled ‘Tackling non-compliance in the umbrella company market,’ which proposes holding recruitment agencies responsible for unpaid taxes if the umbrella companies they work with engage in tax avoidance.
Penny Simmons, Legal Director at Pinsent Masons, warns that this additional financial burden could lead to insolvency for recruitment agencies, as they typically operate with narrow cash flows.
Umbrella companies offer payroll services to contractors employed through recruitment agencies. They streamline the back-office and accounting functions, simplifying payment processing and tax management for both agencies and businesses.
In recent years, HMRC has intensified its crackdown on umbrella companies that exploit tax loopholes. Nearly all of the 46 “named tax avoidance schemes” currently listed on HMRC’s website are associated with umbrella companies.
Pinsent Masons’ previous research revealed that a significant backlog of tax tribunal cases last year was largely attributed to HMRC pursuing legal action against umbrella companies.
Simmons commented: “The government is proposing to shift a significant amount of tax liability onto recruitment agencies that collaborate with umbrella companies. Many agencies simply lack the financial resources to repay HMRC if the umbrella companies they work with engage in tax avoidance.”
“Some recruiters have failed to conduct proper due diligence on the umbrella companies they engage with. HMRC is now determined to tackle this type of tax avoidance aggressively. Time is running out for those who continue to utilise such schemes.”
“This consultation serves as a clear message to recruiters that they must ensure any umbrella company they collaborate with operates legitimately. The government firmly believes that recruiters using tax-avoiding umbrella companies should bear joint responsibility for any tax revenue lost by HMRC.”