HMRC explained that a key reason the tax tribunal backlog has ballooned so quickly is the large number of cases it is bringing against ‘umbrella companies’ it believes have underpaid VAT.
Umbrella companies typically provide payroll services to contractors who are working for a business through a recruitment agency. Umbrella companies allow contractors to share a back office and accounts function, making it simpler for recruitment agencies and businesses to process their pay and tax.
According to multinational law firm Pinsent Masons, HMRC is undertaking a significant campaign of compliance work against umbrella companies, as it believes it has identified high levels of VAT avoidance by umbrella companies on contractors' earnings.
HMRC says many umbrella companies have wrongly claimed their contractor’s earnings are VAT-free. HMRC hopes to be able to clear the backlog quickly, as a small number of cases will be brought forward as a test and the results will be applied to all the other cases.
Pinsent Masons Partner Steven Porter said: “With a large number of umbrella companies suspected of VAT avoidance, the tax tribunal backlog has grown massively in a very short time.
“Contractors looking to sign up with an umbrella company should be aware that it is likely the umbrella company will be required to pay VAT. HMRC will view any claims to the contrary with suspicion.
“HMRC and the tribunal are aiming to clear the backlog of tribunal cases quickly – HMRC are confident that they will win and move on to collecting the VAT it believes it is owed.
“HMRC sees the tax affairs of contractors as an area where it is missing out on a lot of unpaid tax. Umbrella companies are firmly in its crosshairs.”
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