Corporate report

Tax compliance of HMRC suppliers

Updated 11 May 2022

Purpose

The purpose of this report is to provide additional information following the House of Lords Finance Bill sub-committee hearing on 16 December 2020. The report sets out HMRC’s approach to ensuring the tax compliance of its suppliers, with a particular focus on contractors and Debt Collection Agencies (DCAs).

Executive summary

HMRC and Revenue and Customs Digital Technology Services (RCDTS), the not-for-profit limited company that delivers IT services for the department, use different forms of external contractor resource in order to support the delivery of their objectives. They use contingent workers engaged through contingent labour agencies, and services supplied through contracts where the supplier may have their own contractors doing work for them.

HMRC, like all government organisations, requires the agencies supplying contingent labour and companies providing services through contracts to meet the Government Buying Standards.

HMRC conducts comprehensive due diligence on all suppliers with which it has a direct contractual relationship, both during the initial contracting phase and then subsequently during contract management.

Following the introduction of the off-payroll working rules for the public sector in 2017, HMRC has increased its monitoring of contingent workers. HMRC also performs additional checks to manage the risk of engaging contingent workers who use disguised remuneration (DR) tax avoidance without the knowledge of the departmental engager or the hiring agency:

  • since 2017 HMRC has matched the data in its contingent worker database with its database of known users of tax avoidance, in order to identify contingent workers using disguised remuneration (DR) avoidance schemes.
  • in March 2020 HMRC introduced a new process whereby the tax compliance of new contingent workers is verified as part of their pre-engagement checks. This process aims to identify known users of DR before they start with the department and prevents them being engaged in the first place.

HMRC performs a full check of its contingent worker population every 4 months. The results of these checks may vary over time for the following reasons:

  1. HMRC’s contingent worker profile changes
  2. contingent workers’ behaviour can change
  3. HMRC’s compliance intelligence is regularly updated as taxpayers send in their returns, intelligence is obtained, and via case work. Consequently, HMRC’s knowledge of non-compliance can lag non-compliant activity. This is because it can take time for HMRC to identify that non-compliance has occurred. For example, it takes time for relevant returns to be submitted and assessed, or for intelligence to be obtained in other ways. In some circumstances this can take several months

HMRC incorporates standard tax compliance clauses into all of its commercial contracts. Where HMRC identifies an issue with the compliance of a supplier it takes action according to the terms of its contract.

Where HMRC identifies a contingent worker engaged by the department to be a current user of DR it acts to terminate the engagement with immediate effect. In all instances where contingent workers are discovered to have used DR, they would be subject to compliance action by HMRC like any other taxpayer.

Just as for other taxpayers, HMRC will also investigate the schemes identified and their promoters, taking compliance action where appropriate using a range of compliance measures.

Similarly, regardless of how HMRC discovers that a service contractor working for a supplier is a current user of DR, it will ask the supplier to take that individual off HMRC work.

The results of the checks and any associated actions are recorded in Annex 1 - data on use of disguised remuneration. The annex is an accurate representation of information known as of 26 April 2021 and an updated version will be published annually.

HMRC uses the cross-government Debt Market Integrator (DMI) framework agreement with Indesser for all external debt management service and collections.

This framework is owned and managed by Crown Commercial Services (CCS) on behalf of HMRC and other government departments. As part of this arrangement, both Indesser and HMRC conduct checks on the Debt Collection Agencies (DCAs) who form the panel serving HMRC.

a. Background

HMRC and RCDTS use contractors to act as a flexible complement to their permanent workforce, either to increase capacity or to provide a specific capability, in the same way as many other government departments.

HMRC and RCDTS use contractors via two distinct routes: engaging individual contingent workers or making use of service contracts.

Contingent labour

HMRC uses framework contracts managed by the Crown Commercial Service to engage contingent workers via agencies. These contingent workers form a flexible complement to HMRC’s workforce and are sourced through a contingent labour agency.

With contingent labour there is always at least one agency between HMRC and the individual contingent worker, although in practice this contract can be further sub-contracted. As is the case for many other departments, this means that there are often multiple agencies between the department and the contingent worker themselves.

Service contracts

HMRC also contracts with organisations that supply a service for the department. These suppliers are responsible for delivery and performance and use a combination of payroll and non-payroll staff to deliver their services. They are responsible for the lawful engagement of their own contractors.

These individuals are referred to as service contractors. Any contractors engaged by the supplier have their own arrangements with, and are directly managed by, the supplier and are wholly their responsibility. HMRC has no control over the approach its suppliers take to hiring contractors.

Disguised remuneration

Disguised remuneration (DR) schemes are artificial arrangements that use loans, often paid through offshore trusts, to seek to avoid paying Income Tax and National Insurance contributions on earnings. The loans are provided on terms that mean they are unlikely to be repaid, so they are no different to normal income and are taxable. HMRC has consistently challenged their use and publicised the risks of trying to avoid tax.

HMRC has never participated in DR tax avoidance schemes, for example by remunerating contractors through loans or making payments to trusts. It is possible for contractors to use DR without the participation or knowledge of their engager. Any HMRC contractor identified in the course of its compliance work as using a DR scheme would be subject to compliance action by HMRC in the same way as any other taxpayer. Furthermore, any HMRC contingent worker found to be a current user of DR has their engagement terminated with immediate effect.

Similarly, regardless of how HMRC discovers that a service contractor working for a supplier is a current user of DR, it will ask the supplier to take that individual off HMRC work.

Under HMRC’s main contingent labour contracts, details of the individual contingent worker’s arrangements are maintained by the labour supplier rather than by HMRC. HMRC receives from its contingent labour agency a weekly consolidated invoice covering all of the contingent workers engaged via the agency.

Consolidated payment is made to the agency on a weekly basis. As the contingent workers’ details are maintained by the agency, it is possible that contingent workers could engage in tax avoidance without the participation, or knowledge, of HMRC. It is for this reason that HMRC conducts the additional compliance checks detailed in this paper.

Debt Collection Agencies

HMRC also makes use of DCAs to provide flexible augmentation of its inhouse debt collection capability. HMRC contracts with them in a different manner, as set out below.

b. Compliance requirements and checks

This section describes:

  • the tax compliance requirements for all contracts in the public sector
  • the enhanced approach, contract terms and additional checks adopted by HMRC for its contracts
  • contingent labour
    • HMRC contract terms for contingent labour
    • specific tax compliance checks undertaken by HMRC for contingent workers
  • DCAs
    • HMRC contract terms for DCAs
    • specific tax compliance checks undertaken by HMRC for DCAs

Using the Procurement Process to Promote Tax Compliance

Whenever procuring goods or services, HMRC takes the opportunity to promote tax compliance. This is done in multiple ways, as follows.

Public sector requirements

Suppliers bidding for central government contracts valued at more than £5 million are required to self-certify their tax compliance status (Cabinet Office Procurement Policy Notice 03/14), including declaring:

  1. any convictions for tax related offences or civil penalties for fraud or evasion
  2. successful challenges under the General Anti-Abuse Rule (GAAR) or the ‘Halifax’ abuse principle
  3. involvement in a failed avoidance scheme which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme rules (DOTAS)

The Public Contracts Regulations 2015 (PCR 2015, regulation 57) provide for contracting authorities to exclude a supplier if they are aware it is in breach of its obligations relating to the payment of taxes or social security contributions, and where the breach has been established by a judicial or administrative decision having final and binding effect.

HMRC-specific requirements

In order to discharge its responsibility as the government’s tax authority and maintain public trust in the tax system, HMRC has adopted a strengthened approach to tax compliance for its own procurements.

HMRC reserves the right to exclude a supplier where it can demonstrate a breach of tax or social security obligations by the supplier, including in instances where no binding judicial or administrative decision has been made.

HMRC may exclude that supplier from the procurement or terminate its contract until the supplier settles the tax due. This approach is used for all procurements by HMRC, including contingent labour agencies and fully contracted-out services.

Furthermore, in assessing tax compliance, HMRC looks beyond the entity that is bidding and may exclude a potential supplier if a member of the same group of companies (including overseas entities in the group) which acts as the same economic unit is non-compliant or, in certain circumstances, where the controlling persons of the potential supplier, are non-compliant.

In adopting this approach, HMRC relies on the discretionary exclusion criteria detailed in Public Contracts Regulations 2015 (PCR 2015, regulation 57).

Tax compliance checks during procurement and through contract management

At various points in the procurement cycle, HMRC conducts compliance checks. Section 17 Commissioners of Revenue and Customs Act (CRCA) 2005 allows HMRC to use the data acquired in connection with its tax collection and management function in connection with any of its other functions.

Other government departments are unable to access this data or undertake these checks as part of their procurement process. HMRC also requires non-UK tenderers to provide a certificate of revenue compliance from the tax authority in the country in which they are registered for tax purposes.

HMRC conducts a wide range of supplier due diligence during selection, including making use of internal and external data sources and reports.

External data sources

FAME (UK and NI) and/or ORBIS (Global) financial checks provide information regarding a company’s legal structure and status as well as their accounts, size and business activities, key financial data, a detailed credit score, list of directors, accountants, shareholders, parent and subsidiary company information.

This provides deep insight into the financial health and organisational structure of companies bidding for and/or delivering contracts for HMRC. Whilst not specifically assessing compliance, these checks may identify concerns around financial stability that can be an indicator of potential poor tax compliance.

Internal HMRC data about compliance checks

These cover VAT, Corporation Tax, Pay As You Earn and Self Assessment regimes. HMRC also verifies tax compliance with compliance teams where appropriate.

These teams highlight poor compliance or perceived risk, based on a review of information about a company, its directors, individual suppliers, company overviews, compliance history and risks across all tax regimes, and National Minimum Wage compliance.

The Public Contracts Regulations allow for HMRC to take a tougher line than the cross-government position and as such permit HMRC to apply discretion in decisions to exclude a supplier from the procurement process or terminate an existing contract.

Exclusion is based on the grounds of tax non-compliance as determined by ‘any appropriate means’, which means HMRC have the advantage of being able to use any information it holds. HMRC can take account of the nature and extent of non-compliance, as well as any mitigating actions taken by the supplier.

Following contract award, tax compliance supplier checks are undertaken annually for all contracts, except those that are categorised as the lowest level of value, risk and complexity and are transactional in nature.

Promoting Tax Compliance through HMRC Contract Terms

i. All HMRC contracts

HMRC incorporates standard tax compliance clauses into all of its commercial contracts, including:

  • Tax Warranties – the supplier confirms they have complied with all applicable tax laws and notified HMRC of any Occasions of Tax Non-Compliance and any litigation, enquiry or investigation
  • Promoting Tax Compliance – requiring the supplier to comply with all tax laws and regulations and to provide agent and supplier or subcontractor information
  • HMRC can set off tax due from the supplier against sums due from HMRC to the supplier under the contract. HMRC has never needed to use this provision
  • the supplier is obligated to provide information demonstrating how it complies with its tax obligations; if the supplier fails to provide this information, HMRC may terminate the contract, though has never needed to do so
  • requiring the supplier to ensure that its subcontractors do not put in place arrangements involving offshore companies designed to achieve a reduction in United Kingdom tax which would otherwise be payable. A failure by the supplier (or a key subcontractor) to comply with this requirement would allow HMRC to terminate the contract, though these circumstances have not arisen, so it has never had to do so
  • obliging the supplier to indemnify HMRC against any income tax, National Insurance and social security contributions and any other liability, deduction, contribution, assessment or claim arising from or made in connection with the provision of the services by the supplier or any supplier personnel for which the supplier is not primarily liable to account to HMRC under the relevant laws and regulations. Any failure to meet obligations enables HMRC to terminate the contract, though no such failure has occurred, so HMRC has never had to do so

Where HMRC contracts are awarded via a ‘call off’ from a Crown Commercial Service (CCS) Framework Agreement, HMRC ‘adds in’ its additional, more robust mandatory tax compliance clauses to these contracts. These clauses are not routinely included in all other government contracts.

Penalty clauses are generally deemed ineffective and unenforceable in English (Contract) Law. For this reason, HMRC, in line with other government departments, does not apply them within its Terms and Conditions.

Service Points and Credits are a mechanism HMRC uses in its Terms and Conditions in order to provide financial remedies to address inadequate performance against agreed service levels.

You can read HMRC’s standard Terms and Conditions on GOV.UK.

ii. HMRC contingent labour contracts

Prior to February 2020, the terms of HMRC’s contingent labour contracts were as detailed in the previous sections, with tax compliance obligations for any supplier applied to its main contingent labour agency.

From February 2020, HMRC agreed with its main contingent labour agency that the tax compliance clauses would not only apply to them, but also be incorporated into the work orders issued by the supplier to individual contingent workers whose engagements were with them directly.

By the end of March 2020, HMRC had agreed with its main contingent labour agency that the same clauses would also be included in any agency and umbrella contracts the agency had, ensuring visibility of HMRC’s requirements for all contingent workers in the supply chain.

These changes resulted in all companies and workers in HMRC’s contingent labour supply chain having full visibility of HMRC’s contract terms, and the requirement to comply with them.

Tax compliance checks specific for contractors

Before 2017, HMRC operated in a manner similar to other public sector engagers, managing contractors according to the provisions described in the Review of the tax arrangements of public sector appointees, published by HM Treasury in May 2012. Following heightened interest in DR avoidance, HMRC sought to understand the tax arrangements of its contractors in more detail.

In relation to contractors engaged by suppliers as part of a service contract, they are directly managed by, have their own arrangements with, and are wholly the responsibility of the supplier. HMRC does not have knowledge of or control the approach its suppliers take to hiring contractors and is unable to share confidential tax compliance information with the supplier. As such, whilst these suppliers must comply with tax law and accept HMRC’s tax compliance clauses, they do not face additional compliance checks beyond those applicable for all HMRC suppliers.

Since 2017, and in order to comply with the introduction of the off-payroll working rules for the public sector, HMRC has maintained a centralised database of the contingent labour working for HMRC and RCDTS. Initially this database contained limited information, however, it has been enhanced over time.

As the tax authority for the UK, HMRC is in the unique position of being able to carry out additional checks to reduce the risk of those in its contingent labour workforce using DR. This is done in the following 2 ways.

i. Full review of population of contingent workers

Since 2017 HMRC has matched the data in its centralised contingent worker database with the data in its database of known users of tax avoidance held by its Counter Avoidance Directorate, in order to identify contingent workers using DR avoidance.

This process was run on an annual basis and, due to the limited information initially available in the contingent worker database, there were initially no positive matches.

In November 2019, HMRC first identified contingent workers engaged by the department who were current users of DR schemes. Following this, in early 2020, HMRC began to systematically collect the National Insurance numbers of its contingent workers in order to substantially enhance the ability to successfully match the 2 data sets.

This process of regularly checking data on HMRC’s and RCDTS’ contingent workers is now carried out on a four-monthly basis. It is possible that contingent workers can be identified as using DR tax avoidance only after they have worked for HMRC for a significant period.

This is because the compliance database contains known users of tax avoidance. It is also possible for a contingent worker to use a DR scheme for some time before HMRC’s compliance teams identify that use. The compliance database is regularly updated with the latest available information to ensure any contingent workers who HMRC knows to be using DR are identified at the earliest possible opportunity.

It is also possible for contingent workers to start using DR part way through their engagement with HMRC. Consequently, HMRC’s knowledge of non-compliance can lag non-compliant activity by several months.

Where HMRC discovers that a contingent worker, engaged by either HMRC or RCDTS, is a current user of DR it acts to immediately terminate the engagement. For further details, please refer to Annex 1 - Data on use of Disguised Remuneration.

HMRC does not view prior use of DR, or having sent an individual an educational letter advising them of the risks of tax avoidance, as suitable grounds to end an engagement or take someone off HMRC work.

In all instances where contractors are discovered to have used DR, they would be subject to compliance action by HMRC like any other taxpayer. HMRC will also investigate the schemes identified and their promoters and take compliance action where appropriate.

Full details of HMRC’s strategy for tackling the promoters of tax avoidance schemes are set out in the department’s promoter strategy.

Where a contingent worker uses a DR scheme, typically they will have been sold that scheme by an umbrella company that is part of a long supply chain, potentially including multiple umbrella companies and employment agencies.

It is possible for a contingent worker to be using a DR scheme without the knowledge of either the end engager (in these cases HMRC or RCDTS) or the employment agency with which the engager directly contracts.

Under its standard contractual framework, where HMRC identifies a contingent worker who is working for HMRC or RCDTS and is currently using a DR scheme, HMRC can and does terminate that engagement.

HMRC recognises that a contingent labour agency does not have tools at its disposal such that it can consistently and reliably identify tax avoidance of this sort within its supply chain. Accordingly, HMRC focusses its efforts on specific, identified contingent workers.

Through its contractual arrangements with its primary employment agency, HMRC already seeks to minimise the risk that contingent workers using DR tax avoidance schemes are offered to HMRC or RCDTS, but the department cannot share taxpayer confidential information with the employment agency and recognises that there are therefore limits on their ability to identify where DR is being used.

ii. Pre-engagement check process

In March 2020 HMRC introduced a new process whereby the tax compliance of new contingent workers is verified as part of their pre-engagement checks.

This enables HMRC to identify known users of DR before they start with the department and helps prevent them being engaged in the first place. This check relies on the same database of known users of tax avoidance held by HMRC’s Counter Avoidance Directorate.

Since there can be a delay between a contingent worker using DR and HMRC’s compliance teams identifying the issue, it is possible for a contingent worker to be engaged by HMRC if their use of the scheme has yet to be identified by HMRC’s Counter Avoidance Directorate.

It is also possible for a contingent worker to start using DR part way through their engagement with HMRC, this would not be picked up by the pre-engagement check.

iii. HMRC Debt Collection Agencies

HMRC uses the Debt Market Integrator (DMI) framework agreement with Indesser for all external debt management service and collections. This framework is owned and managed by Crown Commercial Services (CCS) on behalf of HMRC and other government departments.

Under the framework, HMRC have a Call Off Order Form with the DMI (Indesser), and the DMI in turn have a direct contractual relationship with TDX Group as the prime subcontractor and managing agent. Part of TDX’s role as the managing agent is to manage the panel of 14 DCAs that service the DMI, of which 8 are allocated to HMRC.

Therefore, the contractual relationship is between TDX Group and the individual DCAs. HMRC’s tax compliance clauses are included in both the framework and Call Off Order Form with the DMI (Indesser). They are also included in the contract between DMI and TDX Group, and the individual contracts between TDX Group and the DCAs.

Under the Commissioners of Revenue and Customs Act (CRCA) 2005, sections 12 and 14, the HMRC Commissioners have delegated authority to the DCAs to collect debt owed to HMRC, which also includes the handling of data.

In order to qualify for a delegation, the DCA is required to satisfy HMRC Financial Accreditation, which provides assurance to the Principal Accounting Officer that any new systems and changes to existing systems are designed and adhere to the key principles of both the HMRC Financial Systems Strategy and the HMRC Payments Strategy.

Financial Accreditation also protects the accuracy and completeness of HMRC’s Resource Accounts and Trust Statements. As part of the accreditation process HMRC tests the flow and accuracy of financial data between HMRC, the supplier (TDX) and the DCAs and that financial control is built in to systems and processes.

To receive Financial Accreditation the DCAs must pass all the requirements of the HMRC test plan that the DMI Team share with suppliers during onboarding or when a new debt type is introduced.

The results are submitted to the HMRC Corporate Finance team for approval. Once approved, a confirmation email is sent to the DCA and copied to Indesser and the DCA can commence work on behalf of HMRC.

It is also required to:

  • ensure all HMRC data processed, transmitted or stored remains inside the UK
  • have valid ISO/IEC 27001 accreditation from a UKAS accredited certification body covering information security management
  • hold valid Payment Card Industry Data Security Standard compliance certification, if a payment processor

In addition, the DCA is subject to the same strict duty of confidentiality that applies to HMRC under section 18 CRCA, including the criminal sanctions under section 19 CRCA for the unlawful disclosure of HMRC’s information.

The DCA is also required to adhere to stringent standards and follow strict rules on data security.

All DCAs on the panel are subject to financial and compliance checks carried out by the DMI and TDX, results of which are shared with government customers, including HMRC, on a quarterly and monthly basis. The financial assessment of the DCAs includes:

  • business operations, capacity and growth
  • revenue
  • cashflow and working capital
  • ownership structure and impact on financial position
  • Equifax Business Insights and financial statements

Along with the DMI and TDX, all of the DCAs are regulated by the Financial Conduct Authority (FCA).

In addition to the above checks, all DCAs used for HMRC debt collections are subject to HMRC tax compliance and politically exposed persons (PEPs) checks on all UK Company Directors (as outlined in the section Tax compliance checks during procurement and through contract management above).

HMRC also conducts additional monitoring, assurance and performance checks executed by the HMRC Debt Management team.

It is important to note that the checks conducted by HMRC are designed to identify non-compliance with legal obligations. HMRC’s standard contractual terms require the supplier to comply with all tax laws and regulations and to provide agent and supplier or subcontractor information.

It is possible for a supplier, or an individual Company Director, to make use of arrangements that do not amount to tax avoidance but, whilst entirely legal, are widely viewed as ‘socially undesirable’. In these cases, HMRC is unable to exclude suppliers or individual Company Directors unless their behaviour falls outside the scope of what is legal.

All of the DCAs on the panel used by HMRC, as well as their UK Company Directors have passed these checks, and are subject to the ongoing monitoring described. Should non-compliance be identified, it will be dealt with according to the provisions of the contract between HMRC and the DMI.

c. Future action

As the UK’s tax authority, HMRC will continue to hold itself to the highest possible standard to assure the tax compliance of its suppliers. Data will be regularly reviewed and an update of the information in Annex 1 will published annually on GOV.UK.