The recommendation has been made by the Economic Affairs Committee in a House of Lords report. The report uncovered “disturbing evidence” regarding the government’s approach to the loan charge, a fee that was brought in to tackle ‘disguised’ pay schemes.

Under these schemes, workers are paid by way of a loan, an arrangement that is intended to avoid tax and National Insurance Contributions for the employee.

One such example involved a social worker, made redundant by her local council, re-engaged as a contractor through an agency for five years and then re-employed as an employee. The worker was left with a loan charge equivalent to a year and a half’s salary and no way of paying it.

Among a series of recommendations, the report calls for an independent review, commissioned by the Treasury, to consider the establishment of an independent body to scrutinise HMRC operations.

Dave Chaplin, CEO and founder of contracting authority ContractorCalculator, backed the proposal.

“The recommendation to consider the establishment of an independent body to scrutinise the operations of HMRC is very much welcomed. We desperately need oversight of HMRC to deliver accountability and fairness for taxpayers. Had that body existed, the retrospective nature of the loan charge, which the Lords have recommended be revoked, may not have happened.

“No-one wants aggressive tax avoidance, but the catalyst that results in these schemes is ‘aggressive tax legislation’ enacted by HMRC, with measures like IR35 in April 2000 and its more ghastly sequel, the off-payroll reforms in April 2017.

“The response by tax payers is hardly surprising. Further oversight of HMRC should hopefully result in less aggressive tax legislation, resulting in less aggressive tax avoidance.”

And Chaplin claims he is seeing new schemes being designed ahead of roll out of the IR35 reforms to the private sector in April 2020.

“History is likely to repeat itself, the result being damage done to the flexible workforce, more tax payers unwittingly becoming tax cheats, and a travesty 10 times worse than the loan charge surfacing in 10 years’ time.

“Agencies are already subject to the Criminal Finance Act, so if they are found to be facilitating tax avoidance/evasion then they can be subject to criminal charges.

“HMRC could decide to use those powers to pursue agencies (or agents) that have promoted these schemes.”

Julia Kermode, CEO of trade body the FCSA, agrees: “The Criminal Finances Act (CFA) makes companies, including recruitment firms, criminally liable if they fail to prevent tax evasion and prosecution could lead to criminal conviction and unlimited fines. In the case of loan schemes, recruitment agencies have a responsibility to ensure that they are not unwittingly recommending such schemes to their workers, otherwise the business could be criminally liable for failing to prevent tax evasion. 

“This is particularly important right now, in light of the proliferation of tax avoidance schemes that are popping up and capitalising on the IR35 changes in the public sector, and recruiters must ensure that their supply chain is not facilitating tax avoidance. 

“Due diligence is essential and as a minimum recruiters should consider these three questions of every supplier on their PSL: Is the company you pay the same one that pays your workers? Do you know that they are not contracting with any entity outside of the UK? And do you know the supplier is paying the correct VAT, PAYE tax and NI to HMRC?”

In its response to the report, a government spokesperson said: “We’ve taken unprecedented action to crack down on avoidance and evasion, making sure people pay their fair share of tax and securing funding for our vital public services. Parliament has given HMRC powers it needs to tackle businesses and individuals who do not pay their fair share, and it uses them responsibly and subject to appropriate checks and balances.”

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