HMRC denies misleading House of Lords over IT contractors’ use of tax avoidance schemes

HM Revenue & Customs (HMRC) denies claims by MPs that it withheld information from the House of Lords about its technology subsidiary’s use of IT contractors that were found to be participating in tax-avoiding disguised remuneration (DR) schemes.

MPs, who form part of the 240-strong Loan Charge All-Party Parliamentary Group (APPG), say HMRC should be investigated for a possible breach of the civil service code for repeatedly dodging questions about its alleged engagement of DR scheme-enrolled contractors.

In a letter to HMRC CEO Jim Harra, the APPG claimed that the government department had previously “evaded questions” on multiple occasions about whether any of its contractors had ever made use of DR schemes, including when quizzed by the House of Lords Economic Affairs Finance Bill Sub-Committee in November 2018.

The Loan Charge APPG claims that written questions it submitted to HMRC about its alleged use of contractors that were signed up to DR schemes went unanswered, and the Treasury also “failed to elicit a straight answer” when asked about this subject via a number of tabled parliamentary questions.

The APPG said it had cause to quiz HMRC on this topic after receiving evidence from IT contractors confirming that they had made use of DR schemes while working for HMRC and, as such, had found themselves in-scope of its tax avoidance-tackling loan charge policy.

In response, a flurry of freedom of information (FoI) requests were sent to HMRC in 2019 and 2020, seeking clarification about whether the department had engaged contractors that participated in DR schemes while working for it.

The responses to these requests confirmed that HMRC and its Revenue and Customs Digital Technology Services (RCDTS) subsidiary did engage at least 15 contractors that made use of DR schemes between 2016 and 2020.

RCDTS exists to provide HMRC with access to managed IT services to help the department deliver on its various digital transformation initiatives, in pursuit of its over-arching goal to become “one of the most digitally advanced tax administrations in the world”.

HMRC’s director of counter avoidance, Mary Aiston, confirmed the contents of one such FoI request in a letter to the government from the House of Lords Economic Affairs Finance Bill Sub-Committee in January 2020.  

In the letter, Aiston confirmed that HMRC had identified “15 occasions” when a contractor working for it had simultaneously been participating in a DR scheme.

“The information revealed by the freedom of information [request] exposes the fact that HMRC withheld the discovery that they did have contractors using the schemes that they say were always unacceptable,” said the Loan Charge APPG letter.

“It is now clear that HMRC (including senior officials) decided to withhold this information from a parliamentary select committee that had challenged HMRC over this matter. It is also now established that when the information was discovered, HMRC did not publish this information, or share it with the House of Lords Economic Affairs Committee, despite the committee’s letters to HMRC regarding this matter.”

The letter added: “So HMRC, presumably including senior officials, have been involved in a decision to fail to inform a parliamentary select committee regarding an important matter the committee had asked about, for the clear reason that the sharing of this information was ‘sensitive’ and embarrassing to HMRC.

“We believe that withholding this information from a parliamentary select committee in this way and for this reason is likely to be a breach of the civil service code. We believe there should be an investigation into this.”

The letter further stated elsewhere that the fact that HMRC contractors were now confirmed as participating in DR schemes undermined a key finding of the December 2019 independent report into the loan charge policy by Sir Amyas Morse.

The controversial policy is designed to clamp down on contractors that made use of DR schemes from 9 December 2010 onwards, which would have seen them receive payment for any work assignments they carried out in the form of a non-taxable loan, rather a conventional salary.

HMRC is of the view that because these loans were never intended to be repaid, they should be taxed as income and it introduced the loan charge policy as means of recouping the tax money it claims participants in these schemes avoided paying. 

The December 2019 Morse Report stated that the legal position on using loan-based DR schemes “became clear” from 9 December 2010 onwards, following the announcement of the Finance Bill 2011.

The APPG letter stated: “The reality is, far from ‘being clear’ that these schemes were unacceptable and ‘did not work’, HMRC itself was using contractors who were using such schemes up to 2020, even after the loan charge was introduced to Parliament and long after the loan charge legislation had been passed.

“This is more information that shows that the conclusion reached by the Morse Review (staffed by HMRC and Treasury officials and with input from HMRC and the Treasury) that the law was clear from 2010 is unsound.”

In response to the Loan Charge APPG’s accusations, a spokesperson for HMRC told Computer Weekly that the department’s senior leaders had not misled the House of Lords.

“It is possible for contractors to use disguised remuneration without the participation or knowledge of their engager,” said the spokesperson. “Whenever it is, or has been, discovered that a contractor, providing services to HMRC or RCDTS, is currently using a disguised remuneration scheme, we have acted, and will act, promptly to terminate the relevant engagements. 

“We continue to warn people about the risks of using tax avoidance schemes and our advice remains true – if something looks too good to be true, it almost certainly is.”