Observers of British politics may have noticed that all politicians believe there is tax avoidance and tax evasion in the UK and that "something must be done".
The specific allocation of the extra £555m annual funding which Labour plans to give HMRC will be confirmed after the election, but amounts are already earmarked for certain areas, in particular the recruitment of an additional 5,000 HMRC compliance officers.
Funding will also be invested in the digitisation of HMRC, including a "greater use of AI". Data will be collected from predictable sources, such as other government departments, but also information shared via social media, e-commerce and other online platforms. Using AI, we expect HMRC will get better at joining the dots in staffing supply chains, working out how much tax has in fact been paid in respect of contractors, umbrella workers and platform workers (including using data obtained via HMRC's new Platform Reporting legislation), and working out whether someone higher up the payment chain may be liable for missing tax.
Particular targets
Labour's plans on compliance state that any additional resource for HMRC will be strategically focused to maximise returns, in particular on larger businesses where the scope and scale of any tax errors are invariably larger, although we believe that "dodgy" umbrella arrangements and perhaps larger businesses which have umbrella arrangements in their supply chain will be a particular focus area.
The Criminal Finances Act 2017 (CFA) makes it a criminal offence to fail to prevent the facilitation of tax evasion by, among others, your employees or key suppliers. It was introduced in 2017, but Labour has pointed out that no prosecutions have been brought under it yet. With plans to introduce quarterly (non-public) reporting to relevant ministers on the volumes and nature of criminal powers deployed by HMRC, the prospects of a first CFA conviction could be much higher under a Labour government, given Sir Keir Starmer's prosecution background and Labour's aim to establish a deterrent. We suspect the first prosecution might be reserved for a high-profile corporate. Companies that use complicated labour supply chains (end users or large staffing companies or MSPs) are obvious targets for CFA prosecutions.
Labour's plans indicate that HMRC will become more proactive and that compliance activity will rise. Party press releases heralded Labour's proposals on boosting tax compliance as a plan to "take on the tax dodgers to fund our NHS". In the face of such rhetoric, all taxpayers – but particularly larger businesses – may face an unprecedented risk for tax disputes to cause significant reputational harm, and staffing companies and platforms which supply medical professionals and/or care staff may be particular targets.
See our Insight for more predictions about increased tax enforcement under a Labour government.
What about the umbrella consultation?
Alongside this we expect a Labour government to resurrect the plan for specific regulation of umbrella (and potentially certain types of Employer of Record) arrangements. The current government has proposed imposing a statutory due diligence obligation on all users of umbrella companies but we suspect that a Labour government would go further.
It may look at whether chain liability should be introduced, with umbrella tax debt being transferred to staffing companies and end users who have failed to check that the umbrellas are operating properly. This approach builds on the approach in the 2021 IR35 regime and was proposed as part of the recent consultation on regulating umbrella companies. An umbrella/EOR licensing regime may even be looked at, with users liable where they use unlicensed employment intermediaries. (We believe the umbrella companies which operate compliantly will welcome this.)
...and IR35, the agency workers tax regime and MSC?
In the meantime, HMRC is likely to significantly increase IR35 enforcement activity, use its powers under the agency worker tax regime (which in many ways is a better tool for HMRC than IR35) more widely, and apply pressure on contractor models by continuing action under the managed service company (MSC) regime. Each of these existing tax regimes already allow HMRC to target what it sees as false self-employment arrangements.
Might this increased activity, perhaps with extra funding for HMRC enforcement teams from a new government, be enough to eradicate (without new legislation) a lot of what may be seen as "bogus self-employment"?
What to do about increased tax risk and enforcement in labour supply chains
Many businesses still do not have adequate procedures in place (which includes those that may have purchased "off-the-shelf" procedures that have not been properly adapted or updated to reflect current working practices). It will NOT be enough just to check accreditation with a trade body, or check payslips issued by umbrella companies and other suppliers and it is likely no longer enough to ask for copies of RTI information.
HMRC is likely now to expect spot checks to be carried out on individual workers to ask them what net pay they have actually received. Compliance with data protection legislation will need to be considered when requesting and processing workers' pay data, so this will not be straightforward.
Businesses concerned about their position should take (professionally privileged) legal advice to review their procedures as soon as possible and make sure they fully understand how all workers in their supply chain are paid. If there is reliance being placed on IR35 insurance, businesses will need to start looking in more detail at how that insurance will work in the event of a tax enquiry or assessment and whether it will cover all liabilities and costs. Note that it will not be a defence for a staffing company or end user to say that it did not know not enough tax was being paid, and that anything which an accountancy firm or other non-law firm adviser discovers for you is likely to be disclosable to HMRC.
Suppliers and users of medical professionals and healthcare workers should take particular care to check their supply chains.
Take care when looking at new suppliers: we suspect that there will be many "phoenix" arrangements in coming months, as umbrella operators and other intermediaries try to distance themselves from past non-compliance. These new suppliers may however continue to hold historic liabilities and be relatively unstable, even if they no longer use "dodgy" arrangements.
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