HMRC's failure to police sector properly led to 'distressing' loan charge, say MPs

The cross-party group of MPs and Peers state that HMRC “manifestly failed to do its duty on an industrial scale” with regards to workers who worked through agencies using umbrella companies. The MPs claim that if HMRC had policed this sector properly and enforced compliance, there would have been no need to legislate for the loan charge, “nor all the distress it has caused”, because the vast majority of the workers providing their services to recruitment agencies all provide a personal service and should have had PAYE deducted by the agency at source.

The loan charge, announced by Government in 2016, was designed to tackle tax avoidance schemes where individuals receive income in the form of loans that are not repaid to avoid income tax

A spokesman for the APPG said the letter was prompted by a question tabled by former Tory party leader Sir Iain Duncan Smith which asked the Chancellor of the Exchequer, for what reasons HMRC did not enforce the agency rules under section 134 of the Income and Corporation Taxes Act 1988 and section 44 of the Income Tax (Earnings and Pensions) Act 2003.

The reply from the Financial Secretary to the Treasury said that most agency workers must be treated as employees for income tax and National Insurance contributions (NICs) purposes by the agencies that pay them. It added: “Where HMRC finds that an agency has failed to account for tax and NICs, it will seek to recover unpaid amounts due.”

The letter from the APPG to Ms Atkins, which has been signed by co-chairs Sammy Wilson MP and Greg Smith MP and vice-chair Baroness Kramer, said: “You make clear that most agency workers must be treated as employees and that the agencies are required to make deductions of Income and Tax and employee NICs. The answer also makes clear that HMRC must seek to recover any tax it believes should have been paid from agencies. This therefore would also have been the case previously, over the last 20 years, as there has not been any change of the law that has altered this situation or HMRC’s duty to enforce it.

“However, as the Treasury and HMRC know, this didn’t happen with the tens of thousands of contractors who have faced the loan charge (and who either have been pressurised into settling or still face the loan charge), nor with those workers who despite no longer facing the loan charge due to the recommendation of the 2019 Morse Review, still find themselves facing HMRC demands for pre 2010 tax years.

The letter added: "All of this shows yet another unacceptable facet of the whole loan charge scandal and something that we urge you to seek a resolution to, in the light of the nine tragic suicides that one of your predecessors confirmed in July in a letter to MPs.”

A Government spokesman said: “We will respond to the APPG’s letter in due course.”