Payroll tax fraud is a big problem for HMRC and the government. With millions lost to it every year, something had to happen, and happen it did. Recently, HMRC gathered in over £500 million (£524.6 million, to be exact) in ‘lost’ tax payments. Quite a pay day.
The problem seems to lies mostly with what are known as umbrella companies. Although many of these firms are perfectly legal and pay all the taxes that they should, some employ workers only to pay them as a self-employed contractor. This means that they don’t have to foot the bill for National Insurance or Income Tax but since the employee isn’t aware of what has happened (and may not be self-employed anyway), they don’t pay the tax either. These goings on are often hidden underneath all the companies that the umbrella firm deals with, so it is often difficult to dig down to find out who owes what.
Another way that umbrella companies minimise the tax they have to pay is by abusing the travel and subsistence tax reliefs that are available to contract workers – by paying more in the way of these incomes, less tax needs to be paid on the final gross salary. It’s complicated, but that’s all part of the problem; our tax system is confusing and that lays it open to abuse from all sides.
So HMRC clamped down on umbrella companies and conducted a number of investigations, which is when the missing £500 million was finally paid. Although generally a positive outcome, there are worries that scrutinising umbrella companies more closely could mean that the companies who work perfectly legally could come under investigation, which will waste time and money and could have a negative impact on the bottom line.
Is there a better way for HMRC to find out who is or isn’t paying the right amount of tax? Let us know what you think.